Bankruptcy, Personal

Personal bankruptcy occurs when a court of law approves and grants the person's (debtor's) petition or application to legally declare an inability to pay and satisfy monetary obligations (debts) to those owed monies (creditors) for the purpose of eliminating or reducing those debts. In contrast to ongoing income-providing social safety nets, such as welfare or unemployment insurance, to prevent individuals from entering into poverty, bankruptcy has historically been viewed as a means to provide debtors in financial hardship who cannot pay their debts a chance for a fresh start. For example, a person has debts that include credit cards, car loans, a mortgage, and medical bills; loses his or her job; depletes his or her savings; and can no longer meet these debts. The debtor applies to, and seeks the protection of, the bankruptcy court to wipe clean, or at least reduce, those debts. On the opposite side of bankruptcy are creditors and other providers that will not be paid for goods or services already provided, with the result that paying consumers bear the costs of those who cannot, through higher loan and credit card interest rates and prices. Bankruptcy petitions, or filings, have tripled on an annual basis over a 10-year period, culminating in 1.6 million filings in the year 2004.

Social scientists and public policy makers are interested in personal bankruptcy for several reasons: whether or not the factors that contribute to and cause bankruptcies can be identified and somehow lessened; bankruptcy's relationship to other social concerns such as job volatility, income, and family life; the bankruptcy process and its ensuing result as to its fairness, role, and inter-relationship with other social safety nets; and its costs to business in terms of lost revenue, all of which affect social and economic stability.

The factors that contribute to bankruptcy are varied and inter-related. Excessive debt is increasingly a primary factor but is usually not sufficient on its own to trigger a bankruptcy. When coupled with major adverse events like job loss, disability, loss of health care, or other income disruption and additional shocks such as increased medical expenses from illness or [Page 72]injury, the potential for bankruptcy increases significantly. Divorce can also contribute to bankruptcy potential in two-income households that split and become separate economic entities trying to maintain a similar living standard. These factors create a financial vulnerability that increases as individuals save less, reducing their own personal safety net. The vulnerability is compounded as means-based social safety net programs, such as unemployment insurance, health care, and welfare, are restricted due to public policy. Resulting middle-class stability is threatened, and choice of bankruptcy as the final safety net increases in incidence. Research shows that 80 percent of bankruptcy filings result from adverse events like job loss, illness, injury, or divorce and those who filed for bankruptcy were predominantly middle class, with earnings above the bottom 20 percent and below the top 20 percent. This is in contrast to the stereotypical bankrupt debtor who is often viewed as a so-called deadbeat, unwilling to meet his or her debts.

...