Myths or Misconceptions about Consumer Bankruptcy Trends
Myths or Misconceptions about Consumer Bankruptcy Trends
The current debate and legislative proposals regarding consumer bankruptcy are predicated on a number of widely-repeated statements. In this article, I examine three common statements to see how well they comport with available facts.
1) Bankruptcy filings have undergone unprecedented growth in recent years.
Filings increased from 832,829 in calendar year 1994 to about 1.4 million in calendar year 1997. The three-year increase of about 570,000 cases is certainly far larger in absolute terms than during
any previous increase. However, the percentage increase (about 68 percent) has been topped on a number of occasions, including during the three-year periods ending June 30, 1987 (+73 percent), 1981 (+78 percent), 1955 (+70 percent), 1949 (+155 percent), and 1923 (+205 percent).
2) Under a needs-based bankruptcy system there would be billions of dollars available from future income for unsecured creditors.
Drs. Staten and Barron estimated that nationwide, "Chapter 7 debtors in 1996 had the capacity to repay $5.1 billion [non-housing debt] over a five-year period."2 Their report also contained information on the repayment capacity of chapter 13 debtors, which can be compared with actual distribution amounts. In their response to the draft General Accounting Office report on their study, Drs. Staten and Barron indicated that chapter 13 debtors could repay an average of $6,885 to $8,648 to unsecured creditors over five years (depending on whether one assumes that secured debt is reaffirmed). Over the last five years chapter 13 filings have averaged slightly over 300,000 per year. This leads to a very rough estimate that annual payments to unsecured creditors by chapter 13 debtors should be somewhere between $2 and $2.6 billion per year. In fact, according to figures compiled by the Office of Review and Oversight of the Executive Office for U.S. Trustees and by the Administrative Office of the U.S. Courts for cases in Alabama and North Carolina, unsecured creditors were paid approximately $500 million in chapter 13 cases during FY 1996—only about one-quarter to one-fifth of what would have been expected.
3) Bankruptcy losses amount to $40 billion or $400 per household per year.
Whatever the true amount, the burden is not shared equally by all households. Nearly one-half of this amount is for credit card debt, so the ultimate costs are paid by consumers who carry a monthly balance on their credit cards but do not default on their debts. Additionally, nearly one-quarter of the unsecured debt is classified as "personal loans." Therefore, a person who follows Shakespeare’s advice to "neither a borrower nor a lender be"3 could reduce his or her bankruptcy "tax" by close to 75 percent.
Footnotes
1All views expressed in this article are those of the author, and do not necessarily represent the views of the Executive Office for U.S. Trustees. Return to Text
2See Michael E. Staten and John M. Barron, Personal Bankruptcy: A Report on Petitioners’ Ability to Pay, Credit Research Center, Georgetown School of Business, (1997). Return to Text