Advertisement

Journal of Family and Economic Issues

, Volume 40, Issue 4, pp 577–591 | Cite as

Personal Bankruptcy Determinants Among U.S. Households During the Peak of the Great Recession

  • Jonathan BauchetEmail author
  • David Evans
Original Paper
  • 139 Downloads

Abstract

We exploit the longitudinal nature of the 2007–2009 Survey of Consumer Finances to examine whether determinants of bankruptcy identified in the existing literature are applicable to a period marked by a large downturn in the U.S. economy. We develop a framework to organize the literature on the main causes of filing for personal bankruptcy, then test whether these factors held during the 2007–2009 recession by comparing pre-filing characteristics of households who later file for bankruptcy and households who do not file. We find that, when controlling for a large number of individual and household characteristics, relatively few factors were statistically significant when correlated with filing for bankruptcy during the Great Recession. Age and credit card debt were positively associated with filing for bankruptcy. Changes in households’ circumstances (loss of income, retirement, new child in the household) were also statistically significantly associated with filing for bankruptcy. Notably, factors identified in the literature as related to bankruptcy filing were not significant, including income level and negative medical events. The findings help to better understand the complexity of the bankruptcy filing decision, and how to tailor programs and policies to help households deal with financial issues.

Keywords

Credit card Debt Life-cycle Survey of consumer finances 

JEL codes

D1 D14 K35 

Notes

Acknowledgements

We are grateful to John Grable and Sherman Hanna for helpful comments and suggestions, as well as to participants at the ACCI 2017 Annual Conference. We thank Wilson Amaya and Priyanka Rao for excellent research assistance.

Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.

References

  1. Agarwal, S., Chomsisengphet, S., & Liu, C. (2011). Consumer bankruptcy and default: The role of individual social capital. Journal of Economic Psychology, 32(4), 632–650.  https://doi.org/10.1016/j.joep.2010.11.007.CrossRefGoogle Scholar
  2. Angrist, J. D., & Pischke, J.-S. (2009). Mostly harmless econometrics: An empiricist’s companion. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
  3. Black, S. E., & Morgan, D. P. (1999). Meet the new borrowers. Current issues in economics and finance, 5(3).Google Scholar
  4. Braucher, J. (1993). Lawyers and consumer bankruptcy: One code, many cultures. American Bankruptcy Law Journal, 67, 501.Google Scholar
  5. Braucher, J. (2006). Theories of overindebtedness: Interaction of structure and culture. Theoretical Inquiries in Law, 7(2), 323–346.  https://doi.org/10.2202/1565-3404.1128.CrossRefGoogle Scholar
  6. Bricker, J., Bucks, B., Kennickell, A. B., Mach, T., & Moore, K. B. (2011). Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009. Federal Reserve Bank Finance and Economics Discussion Series (FEDS) Working Paper No. 2011-17.Google Scholar
  7. Dawsey, A. E., Hynes, R. M., & Ausubel, L. M. (2013). Non-judicial debt collection and the consumer’s choice among repayment, bankruptcy and informal bankruptcy. American Bankruptcy Law Journal, 87, 1.Google Scholar
  8. Dobkin, C., Finkelstein, A., Kluender, R., & Notowidigdo, M. J. (2016). The Economic Consequences of Hospital Admissions. National Bureau of Economic Research Working Paper Series No. 22288.Google Scholar
  9. Dobkin, C., Finkelstein, A., Kluender, R., & Notowidigdo, M. J. (2018). Myth and Measurement—The Case of Medical Bankruptcies. New England Journal of Medicine, 378(12), 1076–1078.  https://doi.org/10.1056/NEJMp1716604.CrossRefGoogle Scholar
  10. Domowitz, I., & Sartain, R. L. (1999). Determinants of the Consumer Bankruptcy Decision. The Journal of Finance, 54(1), 403–420.  https://doi.org/10.1111/0022-1082.00110.CrossRefGoogle Scholar
  11. Edmiston, K. D. (2006). A new perspective on rising nonbusiness bankruptcy filing rates: Analyzing the regional factors. Economic Review-Federal Reserve Bank of Kansas City, 91(2), 55.Google Scholar
  12. Fan, W., & White, M. (2003). Personal bankruptcy and the level of entrepreneurial activity. The Journal of Law and Economics, 46(2), 543–567.  https://doi.org/10.1086/382602.CrossRefGoogle Scholar
  13. Fay, S., Hurst, E., & White, M. J. (2002). The household bankruptcy decision. The American Economic Review, 92(3), 706–718.  https://doi.org/10.1257/00028280260136327.CrossRefGoogle Scholar
  14. Fisher, J., & Lyons, A. C. (2006). Till debt do us part: A model of divorce and personal bankruptcy. Review of Economics of the Household, 4(1), 35–52.  https://doi.org/10.1007/s11150-005-6696-0.CrossRefGoogle Scholar
  15. Gicheva, D., & Thompson, J. (2015). The effects of student loans on long-term household financial stability. In B. Hershbein & K. Hollenbeck (Eds.), Student Loans and the Dynamics of Debt. W.E. Upjohn Institute for Employment Research: Kalamazoo, MI.Google Scholar
  16. Golmant, J., & Woods, J. A. (2010). Aging and Bankruptcy Revisited. American Bankruptcy Institute Journal, 29(7), 34–35; 74–75.Google Scholar
  17. Grafova, I. B. (2015). Financial status and chronic conditions onset among non-elderly adults. Review of Economics of the Household, 13(1), 53–72.  https://doi.org/10.1007/s11150-012-9172-7.CrossRefGoogle Scholar
  18. Gross, T., & Notowidigdo, M. J. (2011). Health insurance and the consumer bankruptcy decision: Evidence from expansions of Medicaid. Journal of Public Economics, 95(7–8), 767–778.  https://doi.org/10.1016/j.jpubeco.2011.01.012.CrossRefGoogle Scholar
  19. Gross, D., & Souleles, N. S. (2002). An empirical analysis of personal bankruptcy and delinquency. Review of Financial Studies, 15(1), 319–347.CrossRefGoogle Scholar
  20. Hacker, J. (2012). The middle class at risk. In K. Porter (Ed.), Broke: How debt bankrupts the middle class (pp. 218–234). Stanford, CA: Stanford University Press.Google Scholar
  21. Himmelstein, D. U., Thorne, D., Warren, E., & Woolhandler, S. (2009). Medical Bankruptcy in the United States, 2007: Results of a National Study. The American journal of medicine, 122(8), 741–746.  https://doi.org/10.1016/j.amjmed.2009.04.012.CrossRefGoogle Scholar
  22. Horowitz, J. L. (2001). The Bootstrap. In J. J. Heckman, & E. Leamer (Eds.), Handbook of econometrics (Vol. 5, pp. 3159–3228), Amsterdam: Elsevier.Google Scholar
  23. Jappelli, T., Pagano, M., & Di Maggio, M. (2013). Households’ indebtedness and financial fragility. Journal of Financial Management, Markets and Institutions, 1, 23–46.  https://doi.org/10.12831/73631.CrossRefGoogle Scholar
  24. Keys, B. J. (2010). The credit market consequences of job displacement. Review of Economics and Statistics, 100(3), 405–415.  https://doi.org/10.1162/rest_a_00709.CrossRefGoogle Scholar
  25. Kovac, S. D. (1991). Judgment-proof debtors in bankruptcy. American Bankruptcy Law Journal, 65(5), 675–768.Google Scholar
  26. Lawless, R. M. (2012). Striking out on their own: The self-employed in bankruptcy. In K. Porter (Ed.), Broke: How debt bankrupts the middle class. Stanford, CA: Stanford University Press.Google Scholar
  27. Lee, J., & Hanna, S. D. (2012). Limitations of combining hispanics and African Americans for analysis of credit problems. Journal of Consumer Affairs, 46(3), 506–536.  https://doi.org/10.1111/j.1745-6606.2012.01237.x.CrossRefGoogle Scholar
  28. Lefgren, L., & McIntyre, F. (2009). Explaining the puzzle of cross-state differences in bankruptcy rates. Journal of Law and Economics, 52(2), 367–393.CrossRefGoogle Scholar
  29. Lindamood, S., Hanna, S. D., & Bi, L. (2007). Using the survey of consumer finances: Some methodological considerations and issues. Journal of Consumer Affairs, 41(2), 195–222.  https://doi.org/10.1111/j.1745-6606.2007.00075.x.CrossRefGoogle Scholar
  30. Linfield, L. (2011). 2010 Annual Consumer Bankruptcy Demographics Report: A Five Year Perspective of the American Debtor. Institute for Financial Literacy.Google Scholar
  31. Livshits, I., Mac Gee, J. C., & Tertilt, M. (2016). The democratization of credit and the rise in consumer bankruptcies. The Review of Economic Studies, 83(4), 1673–1710.  https://doi.org/10.1093/restud/rdw011.CrossRefGoogle Scholar
  32. Luckett, C. A. (1988). Personal bankruptcies. Federal Reserve Bulletin, 74, 591.Google Scholar
  33. Narajabad, B. N. (2012). Information technology and the rise of household bankruptcy. Review of Economic Dynamics, 15(4), 526–550.  https://doi.org/10.1016/j.red.2012.06.002.CrossRefGoogle Scholar
  34. Pace, L. N., & Lown, J. M. (2016). Consumer Bankruptcy. In J. J. Xiao (Ed.), Handbook of consumer finance research (pp. 315–326). Cham: Springer.Google Scholar
  35. Pence, K. (2015). SCFCOMBO: Stata module to estimate errors using the Survey of Consumer Finances, Statistical Software Components S458017. (04 Oct 2015 ed.): Boston College Department of Economics.Google Scholar
  36. Petroulakis, F. (2017). Labor Supply and Bequest Taxation: Behavioral Responses of Givers. Working Paper.Google Scholar
  37. Ramsey, S., Blough, D., Kirchhoff, A., Kreizenbeck, K., Fedorenko, C., Snell, K., et al. (2013). Washington State cancer patients found to be at greater risk for bankruptcy than people without a cancer diagnosis. Health Affairs, 32(6), 1143–1152.CrossRefGoogle Scholar
  38. Shin, S. H., & Hanna, S. D. (2017). Accounting for complex sample designs in analyses of the survey of consumer finances. Journal of Consumer Affairs, 51(2), 433–447.  https://doi.org/10.1111/joca.12106.CrossRefGoogle Scholar
  39. Sullivan, T. A., Warren, E., & Westbrook, J. L. (2000). The fragile middle class: Americans in debt. New Haven, CT: Yale University Press.Google Scholar
  40. Sullivan, T. A., Warren, E., & Westbrook, J. L. (2006). Less stigma or more financial distress: An empirical analysis of the extraordinary increase in bankruptcy filings. Stanford Law Review, 59(2), 213–256.Google Scholar
  41. Tabb, C. J. (2007). Consumer filings: Trends and indicators, Part II. American Bankruptcy Institute Journal, 25(10), 42–43.Google Scholar
  42. Thalheimer, R., & Ali, M. M. (2004). The relationship of pari-mutuel wagering and casino gaming to personal bankruptcy. Contemporary Economic Policy, 22(3), 420–432.CrossRefGoogle Scholar
  43. Thompson, J. P., & Bricker, J. (2014). Does education loan debt influence household financial distress? An assessment using the 2007-09 SCF Panel. Federal Reserve Bank Finance and Economics Discussion Series (FEDS) Working Paper No. 2014-90.Google Scholar
  44. Thorne, D., Warren, E., & Sullivan, T. A. (2009). Increasing vulnerability of older Americans: Evidence from the bankruptcy court. The. Harvard Law & Policy Review, 3, 87.Google Scholar
  45. Warren, E., & Thorne, D. (2012). A vulnerable middle class. In K. Porter (Ed.), Broke: How debt bankrupts the middle class. Stanford, CA: Stanford University Press.Google Scholar
  46. White, M. J. (2007). Bankruptcy reform and credit cards. The Journal of Economic Perspectives, 21(4), 175–199.CrossRefGoogle Scholar
  47. Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.Google Scholar
  48. Xiao, J. J., & Yao, R. (2014). Consumer debt delinquency by family lifecycle categories. International Journal of Bank Marketing, 32(1), 43–59.CrossRefGoogle Scholar
  49. Zorn, C. (2005). A solution to separation in binary response models. Political Analysis, 13(2), 157–170.  https://doi.org/10.1093/pan/mpi009.CrossRefGoogle Scholar
  50. Zywicki, T. J. (2000). Bankruptcy law as social legislation. Texas Review of Law & Politics, 5, 393.Google Scholar
  51. Zywicki, T. J. (2007). Consumer bankruptcy. In D. Clark (Ed.), Encyclopedia of law and society: American and global perspectives (pp. 275–279). Washington, DC: Sage Publications.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Purdue UniversityWest LafayetteUSA

Personalised recommendations