Personal-Bankruptcy Cycles

Abstract

This paper estimates the dynamics of the personal-bankruptcy rate over the business cycle by exploiting large cross-state variation. We find that bankruptcy rates are significantly higher than normal during a recession and rise as a recession persists. After a recession ends, there is a hangover whereby bankruptcy rates begin to fall but remain above normal for several more quarters. Recovery periods see a strong bounce-back effect with bankruptcy rates significantly below normal for several quarters. Despite the significant increases in bankruptcies during recessions, the largest contributor to rising bankruptcies during these periods has tended to be the longstanding upward trend. JEL: K35, D14, E32

Recent Developments in Consumer Credit and Default Literature

“…See Fieldhouse et al (2014) for a detailed macro-level data discussion. Exploiting regional variation, Agarwal and Liu (2003), Garrett and Wall (2014), and Fieldhouse et al (2012) document similar trends -bankruptcies and delinquencies increase during recessions and, more specifically, increase with unemployment rates. 29 The standard quantitative models of bankruptcy with the usual parameterizations of income shocks over the cycle have struggled to reproduce the key macro observations.…”

“…() for a detailed macro‐level data discussion. Exploiting regional variation, Agarwal and Liu (), Garrett and Wall (), and Fieldhouse et al . () document similar trends – bankruptcies and delinquencies increase during recessions and, more specifically, increase with unemployment rates…”

Handbook of Consumer Finance Research

“…Growth in bankruptcy fi lings has been explained by two opposing conceptual frameworks. One theory blames the reduction in stigma for debtor lapses (economic incentives model), while advocates of a structural (fi nancial distress) explanation blame economic insecurity and a fraying social safety net (Garrett & Wall, 2014 ).…”

“…With so many cases in 2005, it was no surprise that fi lings fell dramatically in 2006, to just over 600,000. Subsequently, as the Great Recession took its toll, household fi nances deteriorated signifi cantly , and fi lings rebounded, though falling short of former levels, reaching 1.5 million cases in 2010 (Garrett & Wall, 2014 ).…”

“…Consumer bankruptcy can be addressed in terms of credit demand and credit supply . First, the literature emphasizes individual choices and public policies that would reduce the need for borrowing (credit demand) that is unsustainable for consumers: increase household savings and minimize debt dependence for regular living expenses Lawless et al, 2008 ); obtain adequate health insurance, perhaps through public health care improvements like the Affordable Care Act (Himmelstein et al, 2009 ); strengthen unemployment insurance (Garrett & Wall, 2014 ); improve public transit to alleviate the fi nancial pressures of personal vehicle ownership; and adequately fund education and occupational training programs to improve household earning potential Porter, 2012 ).…”