Economic Factors Associated with Personal Bankruptcy

An understanding of factors related to trends in the incidence of personal nonbusiness bankruptcy is important to credit managers as well as to economists. This study updates and extends to 1982 an earlier study of economic factors associated with the incidence of bankruptcy from 1950 to 1970. This study shows that the incidence of personal bankruptcy follows movements in a measure of the aggregate household debt burden (total consumer credit outstanding relative to disposable personal income). Unlike the earlier study, we found that independent measures of willingness to file bankruptcy were also significantly associated with the number of bankruptcies filed per 100,000 of population. Our study also indicates that the enactment of the Bankruptcy Reform Act was followed by a significant increase in the incidence of personal bankruptcy. Holding other conditions constant, our model suggests that about 50 percent of such bankruptcies filed in 1982 were attributable to the new law. ECONOMIC FACTORS ASSOCIATED WITH PERSONAL BANKRUPTCY A. Charlene Sullivan The growth in the number of personal bankruptcies has been well publicized, especially since the enactment of the Bankruptcy Reform Act of 1978.Since October 1979, when the law went into effect; the number of personal nonbusiness bankruptcies filed per year per 100,000 of population has more than doubled (Exhibit 1). An earlier study of trends in personal bankruptcies from 1950 to 1970 [11] showed that the incidence of personal bankruptcy was significantly and positively associated with a measure of aggregate consumer debt use. This study extends and expands that analysis of the relationship between the incidence of bankruptcy and household debt burden in light of changes that have occurred in the consumer credit market since 1970, including the new bankruptcy code. The paper is organized into three sections. In the first section, the literature concerning the economic and demographic factors associated with personal bankruptcy is reviewed. Several specifications of a model of personal bankruptcy are empirically tested in the second section. The final section contains a discussion of the results and conclusions. * Associate Director, Credit Research Center and Assistant Professor, Krannert Graduate School of Management, Purdue University. The author acknowledges helpful comments from R. W. Johnson, D. A. Drecnik and the computational assistance of Jim Fain. All remaining errors are the responsibility of the author.