Debt Counseling Helps Bankrupt Americans

There’s no doubt that American are doing a much better job cutting their debt. The average total household debt in the U.S. fell from $35,245 in 2008 to $16,046 in 2009, according to the Federal Reserve, while total U.S. consumer debt fell from $2.56 trillion in 2009 to $2.45 trillion by the end of 2009.

But that hasn’t stopped the bankruptcy train from chugging along on all cylinders. The American Bankruptcy Institute reports that there were 1.4 million consumer bankruptcies filed in 2009, and that there is a 17.5% rise in the number of U.S. consumer bankruptcies in the first quarter of 2010 compared to the same quarter in 2009.

Congress had acted to help consumers deal with bankruptcy, and the jury remains out on how effective 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act turns out to be.

But one area where the law seems to be panning out is in its provision that financially-struggling Americans must undergo debt counseling before they file for bankruptcy. According to the law, before Americans can enter into the bankruptcy process, they must attend a 60- to 90-minute counseling session, where they are taught basic personal finance concepts; learn how to assess their income, expenses, assets and liabilities; and learn how to increase their income or cut expenses to improve their financial situation.

That portion of the law seems to be working — at least that’s the conclusion of a new University of Illinois study that measured the impact of the 2005 legislation’s debt counseling mandate on consumers. The study was co-sponsored by Money Management International (full disclosure: MMI bills itself as the “nation’s largest non-profit, full-service consumer credit-counseling agency”), and supervised by Angela Lyons, an economics professor at the University of Illinois.

About 32,000 MMI debt counseling clients were surveyed, according to a statement released by the nonprofit.

The study is a two-pronged effort to track debtors through the entire bankruptcy experience and then measure outcomes three to six months after they file for bankruptcy. The goal was to measure the effects of the 2005 consumer bankruptcy bill and see if debt counseling had a positive or negative effect.