Bankruptcy patterns highlight social and economic trends

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CHAMPAIGN – A new paper co-authored by a University of Illinois at Urbana-Champaign expert who studies consumer credit issues provides the first comprehensive look at bankruptcy filers in more than 30 years, shedding light on economic stressors facing US debtors.

An analysis of consumer bankruptcies from 2013 to 2019 shows nine distinct patterns common to all filers — a finding that should provide policymakers with a rough blueprint for how to make the current bankruptcy system more effective and efficient, said Robert M. Lawless, the Max L Rowe professor of law at Illinois.


“One in 10 adults in the United States have turned to the consumer bankruptcy system for help, often after struggling for years to pay their debts,” said Lawless, also the program’s co-director. Illinois on Law, Behaviour, and Social Sciences at the College of Law. “Many types of people file for bankruptcy for a number of different reasons, but we have bankruptcy law which is too much of a one-size-fits-all solution. We found that there is no typical bankruptcy filer and that the law must adapt to different situations – in particular to the nine distinct patterns that emerged in our data.

Co-authors of Lawless are Pamela Foohey of the Benjamin N. Cardozo School of Law and Deborah Thorne of the University of Idaho. Lawless, Foohey and Thorne are also co-principal investigators of the Consumer Bankruptcy Project, a long-term interdisciplinary research project that collects demographic data on US filers in bankruptcy.

Using principal component analysis, a statistical technique that exposes strong trends in a data set, researchers combed through 5,600 randomly selected U.S. consumer bankruptcy cases compiled by Consumer Bankruptcy. Project.

“We used the bankruptcy system as a tool to look at the financial situation of American households,” Lawless said. “But after seven years of collecting data, we thought it was time to take a step back and see the big picture. And the big picture is complicated. There is no archetype unique for bankruptcy filers in the U.S. There are, however, a number of distinct models, some of which overlap.

The analysis suggests nine clusters of financial and family circumstances among bankrupt filers: car owners, homeowners, black households, women, black women, single mothers, self-employed, homeowners and people with stuck with long-term debt.

“Two of the biggest drivers of bankruptcy were, as expected, homes and cars, as these are the two most expensive items consumers buy,” Lawless said. “The idea of ​​filing for bankruptcy for these items is to not lose them – so that you are not homeless or unable to get to work. The current bankruptcy system gives people powerful and effective tools to do this.

But there is considerable overlap between the models, according to the research.

“These categories are not necessarily mutually exclusive; they tend to intersect and overlap in many ways,” Lawless said. “Women and black people are disproportionately represented in the data compared to their percentage in the general population, and the same could be said for black women or divorced women with children. Some of these people also apply to save their house or their car. People come to bankruptcy with more than one or two specific sets of financial issues on which to turn their cases.

The findings also point to deeper fault lines in the US economy, the authors said.

“Bankruptcy law is an important part of the social safety net and it can help mitigate the financial fallout from a bad situation,” Lawless said. “But it’s not a magic bullet to solve his financial or social problems in the country in general. It could definitely be improved. »

One particular improvement could be a move to an a la carte bankruptcy system, Lawless said.

“An improved consumer bankruptcy system would provide people with the flexibility to tailor their cases to their primary debt relief needs, which the Consumer Bankruptcy Reform Act 2020 would allow filers to do,” he said. declared.

But the bankruptcy system as it is currently constructed will not address the root causes of people’s financial distress.

“At its core, bankruptcy provides relief from debt, which allows people to plan for a better future,” Lawless said. “The bankruptcy code has no effect on equal pay legislation, paid leave for working parents with children, or the affordability of reliable child care. When people consider filing for bankruptcy, they are already in a deep money pit. Many people’s lives do not improve in the years following their bankruptcy.

The paper will be published in the Georgia Law Review.

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