The Balance Sheets of Low-Income Households: What We Know about Their Assets and Liabilities. Bankruptcy


Building on the prior discussions of debt burdens, negative net worth, and asset poverty, we now look at the potential for bankruptcy as a consequence of accumulating liabilities that outstrip income from employment and assets. One can think of bankruptcy as not necessarily an issue for households with very negative net worth, but rather for households that lack the income (or assets) to service their debts. Most households file for bankruptcy to save their homes or to allay creditors. Filing for bankruptcy, though, has a negative effect on future asset building as it affects the type of credit that is available (likely preventing a home mortgage) and the price of credit that is available. The recent Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8) is unlikely to affect low-income households because it is targeted at households with income above the median.[11]

Notably, bankruptcy filings rose 90 percent between 1990 and 2004 (exhibit 23), as measured by the number of bankruptcy filings per one million individuals. There are several caveats here. First, many low-income families do not have the financial mechanisms at their disposal to get too deeply into debt. Second, at low incomes, debt of $3,000, $5,000, or $10,000 can seem insurmountable yet often does not compare with the sums at stake in most bankruptcy settlements. Third, many lower-income households simply stop making debt payments  perhaps as a result of frequent moves such that bills no longer reach them or because of a conscious decision to stop paying  and their creditors write-off the debts, as the sums involved are not worth the time and cost for some (but not all) creditors to pursue collection further.

Exhibit 23.
Non-Business Bankruptcy Filings per Million Population, 1990-2004

Exhibit 23.  Non-Business Bankruptcy Filings per Million Population, 1990-2004. See text for explanation.

Source: American Bankrupty Institute: Annual U.S. Filing Statistics.

According to Domowitz and Sartain (1999), Stavins (2000), and Fay, Hurst, and White (2002), credit card debt is more closely correlated with rates of delinquency and bankruptcy than is total debt. Furthermore, levels of total debt (including home mortgage) are negatively correlated with bankruptcy. But Fay et al. (2002) conclude that far fewer households file than the number who would actually benefit from filing. Gross and Souleles (2002) note that unemployment and lack of health insurance, while significant, only explain a small part of the decision to file. This review of the literature suggests that there are a number of factors aside from the level of debt that may predict whether a household files for bankruptcy, such as state and federal laws, the concentration of law practices handling bankruptcy filings in a given region, the unemployment rate, liquidity of other household assets, interest rates and a households current debt service demands, and the like. What is also not clear is whether those who file for bankruptcy are worse off economically than those who do not. More research in these areas is needed.

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