The Rise in Personal Bankruptcy

Americans are filing for bankruptcy in droves. Since 1980, the number has risen nearly 350 percent. What accounts for this dramatic rise in personal bankruptcies and what can be done to reduce the number?

Thomas A. Garrett, a research officer and economist at the Federal Reserve Bank of St. Louis, presented his findings on the topic at a seminar in St. Louis on Oct. 24. Judge Barry S. Schermer, chief federal bankruptcy judge for the U.S. Bankruptcy Appellate Panel for the Eighth Circuit, also spoke.

Traditionally, bankruptcies are the result of a negative “shock” to one’s income, such as divorce, unemployment or medical expenses. Garrett’s study—The Rise in Personal Bankruptcy: Causes, Comparisons, Correctives—looks at other possible culprits: increased consumer debt, decreased personal savings, the availability of credit cards, changes to bankruptcy laws and a reduced social stigma associated with filing for bankruptcy. All of these factors contribute to a decline in financial security and an increased susceptibility to bankruptcy, Garrett says.

The data also show that bankruptcy rates vary widely across states in the Federal Reserve’s Eighth District: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. Although all of these states have filing rates greater than the U.S. average, huge differences occur even on the county level. For instance, Shelby County, Tenn., had a filing rate of over 20 per 1,000 people in 2003, the highest county rate in the nation. Missouri and Illinois counties had low bankruptcy filing rates in comparison.

Although there may be several ways to slow the growth of personal bankruptcies, Garrett and Judge Schermer agreed that the most effective strategy is educating consumers.

“Our society has become one of not ‘How much does it cost?’ but ‘What’s my monthly payment?’ ” Schermer says. “If you couple that with a lack of comparison shopping, it’s a disaster. We need to do a better job (of educating) our people earlier in life so they don’t just ask, ‘What’s my monthly payment?’ “

Schools and community groups need to teach children that financial security is their responsibility and not that of a credit card company or government program, Garrett says.

Another key issue is a decrease in the social stigma associated with declaring bankruptcy, he says. Although gathering data on it is difficult, Garrett says it is reasonable to believe that as more people file for bankruptcy, it becomes more socially acceptable.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act became law. The act was designed to reduce the number of personal bankruptcy filings. Time will tell whether the law is effective, but Judge Schermer says it leaves something to be desired. The law is unclear in a lot of areas and is difficult for judges to interpret, he says.

Both speakers also agreed that as the number of bankruptcies rise, so do the number of foreclosures.