Concern with the enforcement of morality usually runs like an underground stream of sentiment beneath the surface of bankruptcy law. If you listen carefully, you can hear it coursing beneath the hubbub of case decisions¹ and efforts to effect statutory change. Over the past several years, Congress has toiled, so far still in vain, to create means-testing barriers to reduce the availability of no-asset chapter 7 discharges. During this time, the usually implicit moral stream has been pumped up to the surface by those who would hold consumer debtors, and their attorneys, to greater account in the bankruptcy courts.

The appeal to morality is forthright. For example:

[W]e have to look deep into the eroding moral values of some to find out what's driving the bankruptcy crisis... [A] significant part of the bankruptcy crisis is basically a moral crisis. Some people just don't have a sense of personal responsibility.²
[T]he recent rise in personal bankruptcies has been significantly influenced by a decline in the personal shame and social stigma traditionally accompanying bankruptcy...³ As a calculating, incentive-driven remedy that can openly be taken advantage of by the opportunistic, bankruptcy dishonors poor but honest non-debtors. An ability-to-pay test minimizes this inequity...⁴ Independent of cost-benefit analysis, means-testing would send an important moral signal to bankruptcy debtors that if they have the ability to repay a substantial portion of their debt, they should be required to do so.⁵

Opponents of means-testing have employed strenuous rhetoric to throw off the opprobrium that means-testing proponents have laid on the debtor community. Usually, it is the credit-card industry that is personified as callous and manipulative, more sinning than sinned against as it expands its markets into demographic niches that inevitably and through no fault of their members will have high delinquency and default rates:

In its relentless attack on American-style bankruptcy, the credit industry makes the same tiresome and disproved claims of the past as it lobbies for special privileges and attempts to shame people out of filing bankruptcy. You need to be aware of their claims and understand why they're full of baloney (with a capital "B"). Bankruptcy is an economic decision, not a morality issue, and you needn't be deceived into viewing it as anything else... That honest taxpayers are supporting people who are bankrupt is nothing short of an outright, bald-faced lie.⁶

Also, for the past 20 years, researchers who have brought empirical results to the means-testing debate have been the targets of harsh criticism from commentators standing on the other side of the legislative/ moral fence.⁷

The severe tone and high intensity of these exchanges support the conclusion that indeed, consumer bankruptcy policy raises heartfelt disagreements that are grounded in the moral and social theories of opposing advocates.

What's Quantification Got to Do with It?

Two questions at the heart of this dispute appear to have quantifiable answers: (1) Do consumer debtors experience less stigma and shame in respect to filing bankruptcy than they did 5, 10 or 25 years ago? (2) If so, have the changes been a significant cause of increased bankruptcy filings?

These are hard questions for quantitative social science to answer. The relationship between shame and stigma needs to be carefully defined in the specific context of family financial management and the use of legal remedies to reduce financial distress.⁸ There are always competing values that need to be resolved into justifications for action. Those who find a loss of shame regarding unpaid debts might ask themselves, from a single parent's viewpoint for example, whether greater shame would attach to paying a credit card bill instead of caring for the immediate needs of one's family. Research of this sort is highly unlikely to measure stigma/shame directly, so research proxies for them need to be thoroughly justified. The phrase "pinning jelly to the wall" is likely to be descriptive of such efforts.

Undaunted by these problems,⁹ three groups of economists published articles in 1998 in which they sought to demonstrate that increasing consumer filings were attributable in significant part to decreasing amounts of stigma/shame attaching to consumer bankruptcy.¹⁰ Proponents of means testing have relied on these publications as scientific support for their own cultural perspectives on the causes and wholesomeness of personal bankruptcy.¹¹

The research results cannot bear the policy weight that means-testing proponents have placed on them. This is not a criticism of the technical competence of the economists. In fact, technical competence in the work is so much in evidence that any connection to the social psychological reality of debtors is quite obscured. As mentioned above, there is no way to measure stigma and shame directly in the multiple regression models the economists use to describe how economic factors relate to each other. In order to play a part in these mathematical models, therefore, "stigma" must be defined in terms of proxy variables. Establishing valid proxies is largely an artform. Like other works of art, success lies largely in the eye of the beholder. For beholders who are already convinced that declining stigma and shame are the root causes of increased filings, any conclusion that doesn't challenge that conviction will be taken to support it. Similarly, beholders who are predisposed against blaming consumer debtors for their filings will find little if anything in these studies to coerce a change of heart. They will conclude that, if the stigma in these articles were a baby, it would have a face that only economists could love.

For readers who are not in either of these two camps, the best option is to read the three articles carefully and then decide whether reality has been captured in the models. Do the proxy variables carry the weight of stigma down the tortured road of the calculations? What the economists are doing here is what economists usually do: They are testing the limits of their methods to tease out causes and conditions lying beneath the surface of everyday life. Also as usual, general readers will understand the first and last pages of the articles and be baffled by the arcana sandwiched in the middle.

Fortunately, in some cases the economists' own conclusions are more modest than the conclusions drawn by others from their data. In the most recent of the three papers, David Gross and Nicholas Souleles are scrupulous to point out inadequacies in their own methods and the methods and results of the earlier two papers. Moreover, in framing their conclusion regarding stigma, they are careful to state that their findings are "consistent with the stigma effect," i.e., they don't contradict it.¹² They were correct to put the matter that way, because, in their mathematical model, "stigma" was what was left over, unexplained, in the results. It could have been stigma; it could have been something else. No one knows.

The earliest of the three stigma papers, by Frank Buckley and Margaret Brinig, is the most accessible to non-specialists. The authors clearly announce what they believed to be true before they began their study: "More recently, however, bankruptcy would appear to have lost much of its stigma. The change in attitudes is likely a consequence as well as a cause of the increase in filing rates since a social sanction is harder to maintain when a pathology metastasizes."¹³ It is helpful when authors analogize a legal choice to a cancer, because it points clearly to the depth of the authors' commitments.

A virtue in Buckley and Brinig's method is their effort to separate chapter 7 from chapter 13 in respect to the effects of stigma on filing rates. This is an important distinction for all empirical studies of consumer bankruptcy. But only Buckley and Brinig attempt to deal with it head-on. Gross and Souleles appear to lump all consumer filings together (and might include some business chapter 7 filings if there was a credit card involved, given the nature of their data set). And Fay, Hurst & White ignore chapter 13, saying "we concentrate on debtors' decision to file under chapter 7 because chapter 7 is usually the most favorable, and debtors have the right to file under it even if their future income is high."¹⁴ This statement is a considerable oversimplification of a complicated matter. It also means that the authors chose not to look for stigma decline in the place where they were least likely to find it. This is a justifiable decision if the goal is to hone one's skills in regression methodology. It is not justifiable if the goal is to tell the whole truth about consumers' bankruptcy choices.

Buckley and Brinig's efforts to make sense of stigma included regressing filing rates across states in relation to the numbers of Catholics listed as living in those states. The limitation of religious choice to Catholics was driven by an apparent lack of available membership data from other churches—a problem that seems now to have been solved.¹⁵ Buckley and Brinig justified their proxy for religious morality as follows: "We would expect that members of mainline religions are socially more conservative than their fellows... Catholicism is the most hierarchical religion and is far and away the largest mainline sect in the United States. Filing rates in Catholic¹⁶ regions might also be lower if Catholics are less entrepreneurial and more risk-averse than Protestants, as Max Weber famously argued."¹⁷

Buckley and Brinig also regressed filing rates against state-wide divorce rates, justifying this proxy for morality as follows: "[W]e would expect promise-breaking in bankruptcy to be related to other social vices. Personal bankruptcy is, if anything, a white-collar form of misbehavior. As such, we would not expect it to be strongly correlated with social vices more closely associated with an underclass, such as violent crime and illegitimacy. However, we hypothesize that the desire for a fresh start from creditors bears a family resemblance to a desire for a fresh start from spouses and that patterns of promise-breaking in divorce rate might usefully predict bankruptcy rates."¹⁸

There are several problems with these proxies. Some are technical. For example, data on religious affiliation and divorce rates were available only at the state level, while bankruptcy filings per adult population were included for each federal district. It seems, for example, that the number of Catholics taken over all of Pennsylvania was used as a single proxy to predict filing rates separately for the Eastern, Middle, and Western Districts of the state. So the religion variable and the filings variable were incommensurate. Further, it is easily demonstrated that the profiles of filings in the three districts are quite different, and in fact that the proportion of chapter 13s filed by consumers also varies between divisions as well as between districts.

Pennsylvania is not the only state in which substantial differences in bankruptcy behavior are found in adjacent judicial districts: The Eastern, Middle, and Western Districts of Louisiana provide another good example. There are, moreover, districts in which the ratios of chapter 7 to chapter 13 filings have shown wide variations over the course of several years—in some districts up, in others down—but in either event, these were changes of considerable magnitude. Consider, for example, that between 1998 and 2002, chapter 7 filings in California fell by 29.4 percent (from 173,188 in CY1988 to 122,193 in CY2002). During the same period, chapter 7 filings increased by 14.5 percent in the rest of the country. Did Californians enjoy a period of moral reawakening during these years? Has shame become trendy there?¹⁹ Is it plausible that such waxing and waning of filings are closely driven by moral fluctuations within these communities? How much are hypothesized changes in stigma intended to explain?

What's Memphis Got to Do with It?

Judge Jones and Prof. Zywicki use Memphis, Tenn., as a poster city for what happens when shame leaves town: "In some places, such as Memphis, the sense of shame has all but disappeared, leading to astonishingly high rates of personal bankruptcy... When the informal norms of shame and stigma break down, the consequences for everyday economic activity are significant."²⁰

There is a problem with this analysis that the authors do not confront. They are correct to note that Memphis has a high personal bankruptcy rate (along with the rest of Tennessee, Nevada and Utah). But Memphis is also remarkable in another way: It has one of the highest chapter 13 filing rates in the country. There are between 2.5 to 3 chapter 13 filings in the Western District of Tennessee for every chapter 7 filing. Furthermore, for the two years 1999-2000, the payments by chapter 13 debtors to unsecured creditors in Western Tennessee was among the highest in the country, ranking seventh—behind Northern California and ahead of Eastern Michigan.²¹

If these Memphis folks are so shameless, why are they voluntarily entering chapter 13 so often and paying their unsecured creditors so much money compared to people in other parts of the country?

One might think of answers to this question that would salvage the dramatic idea that Memphis is a city without shame. It could be, for example, that there is a local legal culture in Memphis that so thoroughly controls the avenues of financial relief that chapter 7 hardly emerges as an option for strapped consumers. But this would be idle speculation. On the face of it, distressed consumers in Memphis present themselves in bankruptcy with the intention of doing what they can to repay their creditors.

Conclusion

The "stigma hypothesis" in respect to bankruptcy filings has not been convincingly demonstrated. But that does not mean it is false or that shame and stigma in respect to bankruptcy are unimportant. It means, in part, that changes in shame and stigma, like any major cultural change embodied in the social psychology of individuals, will not fit easily into the straitjacket of multiple regression, no matter how many dimensions are modeled or how adept the modeler. But if we waited for social science to prove every point before we lobbied or editorialized or voted, we would be stuck far deeper in the mud than we already are. So politics moves on, and social science trudges along trying to catch up. Perhaps the most important lesson to take away from science, before the data allow us to draw a confident conclusion, is that it is pretty easy to be wrong.²²

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Footnotes

¹ E.g., on March 21, 2003, the Supreme Court handed down Archer v. Warner, in which a 7-2 Court held, contra the Fourth Circuit, that the bankruptcy court can look behind a state court settlement agreement to find that a chapter 7 debtor may not, notwithstanding the otherwise binding settlement, discharge a debt that arose out of fraud. Archer v. Warner, No.01-1418, 2003 LEXIS 2498 (March 31, 2003). Writing in dissent, Justice Thomas observed that the Court's holding "ignores the plain intent of the parties, as evidenced by [the] settlement agreement..." In moral terms, the Court decided that bankruptcy law will protect values that the parties at one time had been willing to compromise. Return to article

² Comments of Sen. Charles Grassley in the Senate Debate on S. 625, Nov. 4, 1999. For the entire text, see www.abiworld.org/legis/bills/s625/11-4-99grassley625.html. Return to article

³ Jones, Judge Edith H. & Zywicki, Todd J., "It's Time for Means Testing," 1999 B.Y.U. L.Rev., 177, 180. I use this article as the exemplar of the pro-means-testing positions. The authors' arguments are clear, forcefully stated and replete with signals that the authors have staked out a high moral position. Among its other virtues, the article also distinguishes clearly between stigma and shame: "Personal shame and social stigma go hand-in-hand. Shame is the internal, psychological compass that forces one to keep his word; stigma is the external, social constraint that reinforces this." Id. at 215. See notes 8 and 9 below. Return to article

⁴ Id. at 183. Return to article

⁵ Id. at 191. Return to article

⁶ Personal Bankruptcy for Dummies adapted for the Internet at cda.dummies.com/WileyCDA/DummiesArticle/id-1777.html. Return to article

⁷ See, e.g., Jones & Zywicki, supra n.2 at 192-207, and Sullivan, T., Warren, E. and Westbrook, J., "Limiting Access to Bankruptcy Discharge: An Analysis of the Creditors' Data," 1983 Wisconsin L. Rev. 1091 (1983). For a useful perspective on why the debate has proceeded as it has, see Howard, M., infra n. 22. Return to article

⁸ "Stigma depends on the particular social context in which one finds oneself, and the meaning that one's social identity has in that context." Crocker, J., Major, B. and Steele, C., "Social Stigma," The Handbook of Social Psychology, Fourth Edition, Volume 2, 504, 543 (1998). This is a definitive survey of literature on stigma as of the mid-1990s. It has a bibliography of approximately 300 items. Return to article

⁹ Or perhaps unaware of them: Although the three articles contain many citations, they contain practically no reference to literature outside of economics and finance (see n. 8 above) except for the ritual tip of the hat to Max Weber and a reference to the Official Catholic Dictionary. This suggests, surprisingly, that economics needs no assistance from other social sciences to comprehend the intricacies of stigma and shame. Return to article

¹⁰ Buckley, F. and Brinig, M., "The Bankruptcy Puzzle," 27 J. Legal Stud. 187 (1998); Fay, S., Hurst, E. and White, M., "The Bankruptcy Decision: Does Stigma Matter?" University of Michigan Department of Economics Working Paper Series, www.econ.lsa.umich.edu/ wpweb/fhw.pdf; Gross, D. and Souleles, N., "An Empirical Analysis of Personal Bankruptcy and Delinquency," Wharton Financial Institutions Center Working Paper 98-28-B, www.iue.it/FinConsEU/Literature/papers/gross.pdf. An interesting overview of issues in the economics of debt and credit, which accepts the above stigma arguments uncritically, may be found in slide-show format online: Staten, Michael, "Expanding Credit Without Triggering Bankruptcies: Lessons from the U.S. Experience," www.ecri.be/ homedocs/staten.ppt. Return to article

¹¹ Jones and Zywicki, supra n. 2 at 216-217. Return to article

¹² Gross and Souleles, supra n. 10 at 22. Return to article

¹³ Buckley and Brinig, supra n. 10 at 194. Return to article

¹⁴ Fay, Hurst and White, supra n. 10 at 4-5. Return to article

¹⁵ See, e.g., The American Religion Data Archive, www.thearda.com/test_main.asp?show=RCMS2000. Return to article

¹⁶ Sic. It is emphasized here by the authors to indicate that it is a formal variable in their regression analysis. Return to article

¹⁷ Buckley and Brinig, supra n. 10 at 201. Return to article

¹⁸ Id. Return to article

¹⁹ See the statistical charts published on the U.S. Trustee Program web site for examples of these effects (www.usdoj.gov/ust/statistics/stats-new/statistics.htm). Return to article

²⁰ Jones and Zywicki, supra n. 2 at 217-218. Return to article

²¹ Data on chapter 13 filing percentages may be found at the web sites of the Administrative Office of U.S Courts and the U.S. Trustee Program. Data on payments to unsecured creditors may be found in the audited annual reports of chapter 13 trustees that are published on the U.S. Trustee Program web site. Return to article

²² Readers will benefit from two other treatments of the stigma problem: Howard, M., "Bankruptcy Empiricism: Lighthouse Still No Good" (A Review of Sullivan, T., Warren, E., and Westbrook, J., The Fragile Middle Class), 17 Bankr. Dev. J. 425. See, especially, 450-458 and Kowalewski, K., "Personal Bankruptcy: A Literature Review" (September 2000), www.cbo.gov/showdoc.cfm?index=2421&sequence=0#c4. Return to article