Who files bankruptcy

An academic paper by U.C. Davis’s  Ning Zhu  analyzed the composition of debt compared to income levels among those who filed bankruptcy in Delaware in 2003.  Unfortunately, after all the legislative hoopla in the bankruptcy world, it doesn’t study whether the vaunted 2005 “reforms” to bankruptcy law made any meaningful difference in the incidence of bankruptcy.  Zhu concluded that overconsumption, not divorce, unemployment or ill health, lead to most bankruptcies.

What I found interesting was that the below median income families had debt of nearly the same size as above median income filers.  I saw that as the American Dream writ large:  those with fewer resources attempted to buy the same goods and the same toys as those with greater resources.  It manifested  the Consumer Society where everyone “must have” the indicia of the middle class or even the affluent.

The other point was that the middle class wasn’t doing so well either.  The middle class couldn’t handle the credit they had taken on.

The objectivity of the report was undermined in my mind by the assertion that consumers took on debt with the thought in mind that if they couldn’t pay it, they could dispose of the debt in bankruptcy.  This contention was offered utterly without support;  it runs absolutely counter to my admittedly unscientific sample of people who consult me about bankruptcy.

Again and again, my new clients tell me they never thought they’d be in this setting;  that they’d rather be anywhere else; and that it’s their debt and they want to pay it.  These are not people who took on debt knowing bankruptcy was an exit strategy; they are people who, even sitting across the table from a bankruptcy lawyer, can’t imagine not paying on their debts.

Often I talk long, hard, and bluntly about what the unhealthy determination to pay debt that is overwhelming does to their health; their families; and their ability to be self sufficient now and at retirement.  It frequently takes real persuasion to bring clients to the point where they see that “soldiering on” with unmanageable debt is simply not a viable option.

I would love to hear Elizabeth Warren, author of the Two Income Trap,  take on Ning Zhu’s study.