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Bankruptcy no longer a death knell

U. ILLINOIS (US) — Recovering from bankruptcy and regaining financial stability is possible as long as support through counseling and education is available.

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 to provide services to assist people in making an informed choice about bankruptcy, its alternatives, and the consequences and to give them the financial skills necessary to better manage money and avoid future financial problems.

Economists at the University of Illinois in partnership with Money Management International (MMI) conducted a multi-phase bankruptcy study to measure the impacts of both counseling and education requirements by tracking debtors through the entire bankruptcy process.

“We looked at about 4,000 debtors across the U.S. who filed for bankruptcy,” says economist Angela Lyons. “We learned that the counseling and education requirements appear to be serving their intended purpose and are likely viable mechanisms to help debtors deal with their financial situation and get the fresh start that they need.”

Effects seem to hold over time, Lyons says. “Not only did most participants improve their financial behaviors after counseling, but they were carrying out those behaviors even 12 months later.”

Guidelines included setting short- and long-term financial goals, saving money each month, tracking income and expenses, reducing impulse spending and cutting unnecessary expenses, paying bills on time each month, and managing credit wisely such as by maintaining a debt-to-income ratio below 20 percent.

“Following bankruptcy, we found that many debtors were also starting to work toward longer-term goals such as saving more, starting an emergency fund, buying a car or home,” Lyons says.

“Debtors could benefit from additional education that helps them lay out a post-bankruptcy financial action plan to set personalized financial goals and then motivates then to achieve those goals.

“There are still, of course, barriers to financial recovery,” Lyons says.

“People who, post-bankruptcy, continued to face challenges with job loss, health, child care expenses, and unexpected house and auto expenses were significantly less likely to show improvements in behavior.”

From a policy perspective, the study provides insight into whether counseling requirements are working.

“From an educational perspective, the findings provide valuable insight into how the requirement is helping to improve debtors’ personal financial situations, learn from their mistakes and go on to make sound financial decisions in life.”

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