Document Type

Article

Publication Date

2010

Center/Program

Center for Contract and Economic Organization

Center/Program

The Charles Evans Gerber Transactional Studies Center

Abstract

Bankruptcy is a numbers game. Policymaking, public perception, and the scholarly literature are captivated with the number of annual bankruptcy filings, which hit one million in 2008.1 The number of annual bankruptcy filings has become a barometer of economic health, reflecting an implicit assumption that bankruptcy is a useful proxy for financial distress.

But at the level of the individual family, the causative relation between financial distress and bankruptcy filings is unclear. On the one hand, only a fraction of those in serious financial distress will ever file for bankruptcy. For example, a study by Michelle White examined a group of households in which bankruptcy relief would have afforded an economic benefit to about 15% of them, but only about 0.66-1% sought relief any given year.2 That is, most families in serious financial distress do not file for bankruptcy. In fact, each year foreclosure filings outstrip bankruptcy filings because many families do not even try to use bankruptcy to save their homes.3 Similarly, thousands of families are subject to collection calls for medical bills,4 and yet the number of bankruptcy filings-even at its pinnacle-represents only a sliver of those struggling with bills. On the other hand, we know that many families that file for bankruptcy are so mired in poverty-with no substantial income or assets-that they gain little obvious financial advantage.5 Those families discharge debts that creditors could not have collected in any event.6 These additional, and presumptively unnecessary, bankruptcies drive up the number of filings.

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