As of 2014, more than 77 million people in the U.S. had at least one account reported as “in collection” on their credit reports, owing an average of $5,178 (median $1,349). Distressed debt results in collection lawsuits, a messy and error-prone credit report, and a potential need for bankruptcy. In other words, debt problems are legal problems, and an inability to resolve debt problems leads to legal consequences. What proposals are out there to address the legal aspects distressed debt? How would we know whether those proposals work?
Problems with Current Solutions
Some have suggested legal representation. But there will never be sufficient legal aid resources to provide a traditional, attorney-client relationship to all low- and middle-income individuals facing debt-related legal problems. The key, then, is to produce rigorous evidence regarding when and where to deploy scarce lawyer time most effectively, while designing new interventions less expensive than lawyers.
Others have suggested financial counseling, which routinely covers legal subjects. In 2005, Congress mandated that individuals seeking bankruptcy protection undergo a financial counseling course before receiving a discharge of their debts. Yet, we have little rigorous evidence assessing whether counseling improves credit profiles.
Given the shortage of resources, self-help materials are essential. But current state-of-the-art legal self-help materials use inaccessible legal phrases (“vacating a default judgment” or “civil court summons”) and infrequently use images. And such materials often fail to cover problems do-it-your-selfers routinely face, such as how to overcome feelings of shame and guilt, how to conduct a negotiation, and how to argue to a judge.
The state of the art in legal self-help must change. Legal self-help materials should deploy knowledge from non-law fields (such as the importance of visual images) to communicate feelings of self-agency and optimism that individuals with distressed debt can internalize.
And we need rigorous evidence of what sorts of materials produce good results.
The Financial Distress Research Project will provide rigorous evidence on the subjects just discussed. The Project is a partnership among multiple branches of government, academia (students and professors), multiple non-profit service providers, and the private sector. Its backbone is a gold-standard randomized control trial. The Project will combine this randomized design with highly consequential credit reporting information. And it will supplement all of this information with the results of surveys and court records. The Project will include the following steps.
Creation of self-help materials
More than 60 law students, most of them volunteers, have already dedicated thousands of hours to court observations, individual interviews, and research with one goal in mind: the production of a state of the art self-help Assistance Packet covering how to (1) litigate a debt
collection action, (2) pull, review, and correct errors in a credit report, (3) self-diagnose on whether bankruptcy or negotiation with other creditors is the right option, (4) negotiate with other creditors (with specific materials tailored to credit card, medical, and public/private student loan debt), and (5) file a successful Chapter 7 bankruptcy (including attempting to discharge student loans in bankruptcy).
The Assistance Packet was created specifically for the capabilities of its target audience, namely, persons in financial distress. Thus, it features cartoons that teach legal concepts, material designed to combat feelings of shame and guilt, and small items (such as detachable post-it notes) that have been shown to aid in plan-making and follow-through.
Intake and randomization
An individual who has been sued in debt collection proceedings, who calls a study-created hotline, who meets eligibility criteria (e.g., income and assets below study ceilings), and who agrees to participate will receive limited advice and assistance over the telephone. After she executes appropriate waiver and consent forms (including a consent to allow us to access credit information), she will be randomized to one of four treatment conditions, as follows:
Group 1: All Self-Help
Group 2: Legal Self-Help, Pro Financial Counseling
Group 3: Pro Legal Help, Self-Help Financial Counseling
Group 4: All Pro Help
Finally, we will collect outcome information. We will obtain deidentified credit scores and credit report attributes for each study participant as of three, two, and one years before entry into the study. We will also collect this information at one, two, and three years subsequent to entry. We will collect case records from small claims and bankruptcy courts. And we will survey study participants at intake, year one, and year two to measure overall financial well-being, perceived stress levels, and other wellness indicators.
A comparison of financial health across our four groups will provide gold-standard evidence regarding the effectiveness of self-help packets, financial counseling, and attorney representation. The result will be the richest and most detailed dataset ever conducted in an evaluation of what works for individuals in financial distress. This is rigorous evidence.
Papers and Related Efforts
The Project has resulted in two scholarly papers. The first describes the Project in greater detail (the description corresponds to a slightly out-of-date research design). The second describes the Project’s approach to self-help materials in greater theoretical and practical detail.
The Project has also inspired a successful website dedicated to easing the bankruptcy process for eligible consumers in financial distress.
The Research Team
Jim Greiner, Faculty Director, The Access to Justice Lab; Professor of Law, Harvard Law School
Dalié Jiménez, Associate Professor of Law, University of Connecticut School of Law
Lois R. Lupica, Professor of Law, University of Maine School of Law