Personal Bankruptcy The context of challenging economic times has resulted in sharp increases in the rates of personal bankruptcies filed in the United States (Athreya, 2004). Personal bankruptcy happens when individuals use credit to obtain assets which they are not able to fully pay for because of growing debts due to interest. Interestingly, households generally tend to increase their holdings of debt relative to income, meaning that as household income increases, so does debt. There is an epidemic of over-consumption in the United States, where needs are not distinguished from wants, and instant gratification is easily provided with a swipe of a credit card. Individuals are resorting to borrowing money to pay debts, which creates a cycle that inevitably spirals out of control if not attended to. However, stating that overconsumption is the cause of personal bankruptcy is over-simplifying the matter, as there are several factors that may be involved in an individual need to file for bankruptcy.

Statistics

Personal bankruptcy filings have risen significantly, from 597,965 in 2006 to 1,536,799 in 2010 (Bankruptcy Action, 2011). The average age of individuals filing for personal bankruptcy was 38 years of age, and it was found that these individuals demonstrated slightly more education than people in the general population (Bankruptcy Action, 2011). Couples accounted for the largest proportion of filings, at a rate of 44%, while 30% were women filing alone and 26% were men filing alone (Bankruptcy Action, 2011).

Reasons for bankruptcy

The past decade has been a period of time marked with economic and financial hardship for many, as unemployment rates increased due to businesses in corporate America struggling to stay afloat. This leads into the three most common causes of personal bankruptcy in the United States, with the first and most common one being unemployment. Statistics indicate that two out of three individuals who file for bankruptcy are unemployed, having recently lost a job (Bankruptcy Action, 2011).

Another common cause of the necessity to file bankruptcy is a change in marital status from married to single, which can result in individuals having increased expenses with decreased income and resources. Furthermore, another common reason for personal bankruptcy relates to rising costs of medical insurance and medical care in general. Approximately half of all people who file for bankruptcy have experienced a serious medical problem (Bankruptcy Action, 2011). The three reasons listed above account for the vast majority of filings for personal bankruptcy, as less than 9% of filings are from individuals who have not experienced loss of employment, a serious medical event, or divorce (Bankruptcy Action, 2011).

The number of individuals filing for personal bankruptcy due in part to divorce has been increasing sharply in the past couple of decades (Fisher & Lyons, 2006). Researchers investigated the relationship between divorce and bankruptcy using a study involving income dynamics (Fisher & Lyons, 2006). Results of the study indicated that the relationship between divorce and bankruptcy was reciprocal, with divorce significantly increasing the likelihood of bankruptcy, and bankruptcy significantly increasing the likelihood of divorce (Fisher & Lyons, 2006).

Medical issues also are a common reason for individuals having to file for bankruptcy. Certain research has determined that approximately 54.5% of personal bankruptcies may be attributed to medical problems, and this issue represents a serious and significant threat to the solvency of middle-class Americans who would never have considered themselves at risk prior to the medical event (Dranove et al., 2006). However, Dranove et al. (2006) re-evaluated these research findings and determined that medical expenses were in fact the primary contributing factor in approximately 17% of bankruptcies, and these individuals were low-income earners close to the level of poverty. Furthermore, the researchers suggested that solutions to the issue of bankruptcy associated with medical problems lie in health insurance and health policy reform (Dranove et al., 2006).

Another factor that may potentially be involved in the rise observed in personal bankruptcy is changes in credit market competition in recent years within the United States (Dick & Lehnert, 2010). Researchers have determined a significant association between the credit supply in the United States and ever increasing rates of personal bankruptcy (Dick & Lehnert, 2010). This all stems from bank deregulation, which the researchers suggest may be responsible for explaining 10% of the increase in bankruptcy rates at the very least (Dick & Lehnert, 2010). Other consequences of bank deregulation include increased lending by banks, lower rates of loss on loans, and higher productivity of lending (Dick & Lehnert, 2010).

It was concluded by these researchers that increased credit market competition...

This furthermore resulted in credit being extended more to existing as well as previously excluded households, which resulted in more borrowing, growth of debt, and increases in personal bankruptcy rates (Dick & Lehnert, 2010).
As mentioned earlier, there are several factors associated with the necessity for personal bankruptcy. Some factors are less widely considered, but may be significantly influential. One of these factors is the behavior of casino gambling. Goss et al. (2009) investigated the relationship between gambling at casinos and rates of personal bankruptcy in the United States. Findings of this study indicated that if a county has at least one casino, this factor alone accounts for an increase in rates of bankruptcy by 9% in the first year that the casino is operational (Goss et al., 2009). Interestingly, the rates of bankruptcy fall within the next few years after the casino opens, only to rise again in the eighth year and in years following (Moorman & Garsky, 2008). When analyzing why these results are found, the researchers discovered that this "U shaped" cycle of bankruptcy rates corresponds very closely the statute of limitation period length of six years that is adhered to for all Chapter 7 bankruptcies (Moorman & Garsky, 2008).

Are there factors significantly associated with the likelihood of eventually filing for bankruptcy? Moorman and Garasky (2008) investigated this question through research on bankruptcy precursors. In particular, the researchers examined the extent to which behaviors associated with consumer debt repayment were indicated as precursors to bankruptcy (Moorman & Garsky, 2008). They looked specifically at how common it was for households to seek out bankruptcy protection without first experiencing any sort of financial distress or without making a conscious effort at effectively restructuring debt. Results of the study indicated a significant relationship between prior experience of financial hardship and eventually filing for bankruptcy (Moorman & Garsky, 2008). Interestingly, these researchers also revealed through their findings that consolidation loans often do not help to revive financial well-being, as individuals with these loans were just as likely to resort to filing for bankruptcy as individuals without the loans (Moorman & Garsky, 2008).

Based on all of these findings, the researchers concluded that bankruptcy filings may be reduced through early interventions focused on providing help to consumers experiencing financial distress (Moorman & Garsky, 2008). Non-economic factors associated with bankruptcy were also explored by Sullivan et al. (1988), who found significance in migration both within state and out of state, marital status, state of residence, being self-employed, as well as characteristics of the local legal culture.

Two main methods for filing of personal bankruptcy

There are two provisions of the Bankruptcy Code that are most commonly used by individuals filing for personal bankruptcy. These two provisions are Chapter 7 and Chapter 13 of the Bankruptcy Code. Under the Chapter 7 provision code, individuals filing are required to give up all of their property beyond exemptions allowed by the state. This property is given up to a bankruptcy trustee so it can be sold and distributed to the creditors (Sullivan et al., 1988). Chapter 13 bankruptcy differs in that the individuals filing are able to keep all of their property, but are required to pay a designated portion of their debt over a period of three to five years (Sullivan et al., 1988). Completion of Chapter 13 plans and requirements is significantly related to factors such as job tenure and home ownership, while dismissal is associated with factors like never being married, having children that are dependents, having filed previously, and higher mortgage arrears (Evans & Lown, 2008).

Implications of bankruptcy

Bankruptcy results in different implications depending on several personal as well as circumstantial factors contributing to individual situations. Bankruptcy almost universally results in poor or basically non-existent credit for a period of seven to ten years. However, personal bankruptcy is a means of providing a fresh start to individuals who are deep in debt due to various reasons. The discharge policy of bankruptcy is designed with the intention of individuals maintaining incentives to continue working productively and earning an income (Han & Li, 2007). However, researchers have shown that bankruptcy instead has a negative impact on annual work hours, and it is suggested that this finding is due in large part to the newly found false sense of wealth these individuals may feel after discharge from their debts (Han & Li, 2007). This reflects one potential implication of bankruptcy.

Another potential implication is stigma, although it is suggested by some researchers that the stigma…