Who Went Bankrupt? And Why? (Part One)

Besides the obvious answer — “people with debt problems” — the answer to these questions is the subject of much study over the years. In part this is because most folks cannot imagine themselves filing bankruptcy until they are in very serious financial straits. But the reality is that those filing bankruptcy are not that terribly different from the rest of us. It turns out, bankrupts are your friends and neighbors.

That is one of the points we can glean from a study issued in May, 2007 by the Institute for Financial Literacy, a non-profit financial literacy organization in Maine. The IFL, among other things, offers credit counseling and financial management education services for members of the public, particularly those preparing to file bankruptcy. IFL collected sample information from over 24,000 people during 2006, representing about 4% of the total numbers of consumers who filed bankruptcy last year.

Most of the findings will not surprise consumer advocates. For example, although men have historically had greater access to credit, women still face financial catastrophe at higher rates than men, 54% versus 46%. And this exceeds women’s slight lead in the overall population shares (women constitute about 51% of the population).

The study shows that a majority of bankruptcy filers are in the middle age groups, between 35-54. That’s not unexepected since those are the years when folks would traditionally be borrowing more money. But it is distressing since those are also the prime “earning” years when one would expect families to be able to maximize their income and avoid bankruptcy. The bulge in filing around the middle age years cannot be accounted for as simply reflecting the general population, since no such bulge appears in Census data for the overall population.

IFL highlights one of the more dramatic shifts that is occurring in the bankruptcy world: The aging of bankruptcy. Although still a small share of the overall numbers of people filing cases, those over 55 and particularly over 65 are filing more often than other age groups now. As the study points out, the administrative office of the U.S. Courts found that the median age of those filing bankruptcy shifted from 37.7 years old to 41.4 years old between 1994 and 2002. This is a dramatic move during such a short period of time and only time will tell if additional help like the Medicare drug benefit will slow this trend.

The study also found that those with lower income are more likely to file bankruptcy. Indeed more than 65% of those surveyed reported their income was $30,000 or less, with another 15% reporting income of $40,000 or less. In most parts of the country, this translates into a fairly low standard of living — the national median income for 2004-2005 was $46,071 — even without taking into account how many people may be dependent on this income. So the congressional perception that many people were or are filing bankruptcy when they have enough income to pay back something meaningful to their creditors is proving as mythical as as my odds of winning the lottery.