Observing the tenth anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act, I discussed one of its less consequential impacts on New York bankruptcy: whether debtor-education requirements were a waste of time. The Government Accountability Office found that debtors thought the courses were somewhat helpful, but they would not have prevented their bankruptcies. In my clients’ experiences, the debtor education course required during bankruptcy is helpful, but the pre-bankruptcy requirements are a waste of time. The question is, then, what kind of financial education can help debtors avoid bankruptcy?
One answer, according to the Consumer Financial Protection Bureau (CFPB), is that consistently relating some “heuristics” (rules of thumb) to consumers helps them alter their borrowing behaviors. No, heuristics won’t prevent debtors from buying houses that will soon go underwater, but they will help deter people from charging their credit cards needlessly. Because unsecured credit plays a prominent role in New York bankruptcy, the lessons for hampering them can keep people financially afloat.
The CFPB commissioned a study that targeted participants with two credit-related messages via email, Web ads, and even refrigerator magnets to nearly 14,000 participants. The messages were, “Don’t swipe the small stuff: Use cash when it’s under $20,” and, “Credit keeps charging: It adds approximately 20% to the total.” The researchers believed the “20s” that appeared in the messages reflected both the kind of cash consumers tend to carry and the interest rate typically charged on revolving credit.
The researchers found that the “$20” message affected consumers’ behaviors. Their credit-card balances fell by 2 percent on average, amounting to about $104. However, there was no clear evidence that consumers were heeding the message and substituting cash for their purchases—just that their balances fell. The effects of the “20%” message, on the other hand, were less obvious. Recipients had fewer credit inquiries, indicating fewer applications for new credit cards, and younger consumers had slightly lower balances. In all, the “20%” message altered behavior less because it did not specify an alternative to using the credit card as the “$20” message did.
The CFPB concluded from the study that sending low-cost messages to consumers can positively affect how they use their credit cards. More importantly, it demonstrated that rules-based financial education can be effective—possibly more than a debtor-education class. The CFPB acknowledged a few of the study’s weaknesses: Many of the participants were not heavy credit-card users, and they tended to have good credit to begin with. It’s also unknown what message will resonate best with debtors.
The CFPB’s report on the study is here.
Requiring courses of debtors might not prevent a bankruptcy, but behavioral psychology is starting to show that there might be other ways to prevent debt from growing out of control. I’ve written about how researchers disagree over debt-management strategies, so it’s best to find the strategy that works for you—no matter how you learn it. If your debts are becoming insurmountable, though, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
