The Determinants and Consequences of Personal Bankruptcy

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1 The Determinants and Consequences of Personal Bankruptcy Jonathan Fisher Census Bureau Tal Gross Columbia University The views expressed in this research, including those related to statistical, methodological, technical, or operational issues, are solely those of the authors and do not necessarily reflect the official positions or policies of the Census Bureau, or the views of other staff members. This is a discussion of a nascent RDC project. There are no results to show or discuss. 1

2 Outline Bankruptcy in the social insurance system 3. Bankruptcy in the federal statistical system 4. Our external data 5. Matching to Census data 6. Research questions 7. Takeaways for CRDC research Stated purpose of bankruptcy protection From the United States Administrative Office of the Courts web site: The primary purposes of the law of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment. 2

3 The legal process Each state has at least one federal bankruptcy district, with 94 total districts in the U.S. Four districts in Texas Individual (or married couple) must file a bankruptcy petition along with several schedules listing: Assets and liabilities (name and address for each creditor) Income and expenditures Sale or transfer of all assets made within last twelve months Bankruptcy halts a foreclosure process and wage garnishment A lawyer is not required Chapter 7 The Fresh Start Most unsecured debts are forgiven. Exceptions: student loans, child support, tax obligations, and debts incurred by fraud Secured debts are not forgiven, unless the property is relinquished. The filer forfeits assets exceeding the exemption levels. Trustee sells the non-exempt assets and distributes proceeds to creditors. Cannot file under chapter 7 for another eight years. 3

4 Chapter 13 The Reorganization Filer has a 3-5 year repayment plan for a portion of the outstanding debts. Creditors must receive as much under the repayment plan as they would have received if the filer had chosen chapter 7. Assets are not forfeited. Some student loans and some debts are dischargeable under chapter 13. Cannot file under chapter 13 for another two years or under chapter 7 for another four years. Bankruptcy exemptions The bankruptcy exemptions determine how much property a filer can keep. Each state sets its own exemptions Federal exemptions exist; 18 states and DC allow a filer to choose between the Federal exemptions and the state exemptions. The range of exemptions is large. 4

5 Bankruptcy exemptions ($) State Homestead Personal property Auto Jewelry Wildcard Opt-out Federal 21,625 11,525 3,450 1,450 1, Alabama 5, ,000 NO Georgia 21,500 5,000 3, NO Iowa Unlimited 7,000 7, ,000 NO Pennsyl YES Texas Unlimited 30,000 1 vehicle /person 0 0 YES 2 firearms Other Texas Exemptions Bible or other book containing sacred writings of a religion 2 horses, mules, or donkeys and a saddle, blanket, and bridle for each 12 head of cattle; 60 head of other livestock; 120 fowl Health savings accounts 5

6 Rhode Island TITLE 9: COURTS and CIVIL PROCEDURE PROCEDURE GENERALLY CHAPTER 9-26 Levy and Sale on Execution SECTION Body of deceased person exempt. The body of a deceased person shall not be liable to be taken for debt or damages on execution or upon any process whatsoever; and if any officer shall, under color of an execution or process, seize or take the body of any deceased person for debt or damages, he or she shall be fined not exceeding five hundred dollars ($500) or be imprisoned not exceeding six (6) months. Annual Personal Bankruptcy Filings ( ) Personal Bankruptcy in the U.S. 6

7 1978 Bankruptcy Reform Act This act made the law more debtor-friendly. For example, it Allowed joint filing by spouses (cut fees in half) Expanded list of assets that were exempt under bankruptcy Expanded debt that could be forgiven Quarterly Personal Bankruptcy Filings ( ) Personal Bankruptcy in the U.S. 7

8 2005 Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA) Effective October 17, 2005 Headline change the Means Test The means test forces some debtors into chapter 13. Must use chapter 13 if your average income over the last 6 months is more than the median monthly family income in your state, adjusted for family size. Smaller but (more?) important changes Must take a credit counseling course before filing Must take a financial management course before debt is forgiven Must file much more detailed financial information, including tax returns for the previous four years. Higher costs for filing - $2,500 for Chp 7 and $3,500 for Chp 13. Chp 13 repayment plan lasts five years instead of 3-5 years. 8

9 The Social Insurance System National Radio Address delivered February 25, 1935 by Secretary of Labor Frances Perkins: We have come to learn that the large majority of our citizens must have protection against the loss of income due to unemployment, old age, death of the breadwinners and disabling accident and illness, not only on humanitarian grounds, but in the interest of our National welfare. If we are to maintain a healthy economy and thriving production, we need to maintain the standard of living of the lower income groups in our population who constitute 90 per cent of our purchasing power. Bankruptcy in the social insurance system Is personal bankruptcy social insurance? It s insurance -- By forgiving unsecured debt, personal bankruptcy increases disposable income (income not promised to creditors), protecting the standard of living for filers. It s social -- Bankruptcy protection is paid for by a tax on credit. Those with a lower likelihood of repaying debt pay a higher insurance premium (Fisher and Lyons, 2010) Those that live in states with more generous bankruptcy protection pay a higher premium and have less access to credit (Gropp, Scholz, and White, 1997) Bankruptcy in the social insurance system 9

10 Personal Bankruptcy Relative to Other Social Insurance Programs (2007) Program Recipients Medicaid 56,825,000 Supplemental Nutrition Assistance Program (food stamps) Supplemental Security Income 26,316,000 8,207,780 Unemployment Insurance 7,642,400 Temporary Assistance to Needy Families 4,075,611 Personal Bankruptcy 822,590 Dollars Transferred (billions) $ Benefit per recipient Bankruptcy in the social insurance system Personal Bankruptcy Relative to Other Social Insurance Programs (2007) Program Recipients Dollars Transferred (billions) Medicaid 56,825,000 $276.5 Supplemental Security Income 8,207,780 $41.2 Personal Bankruptcy 822,590 $40.9 Unemployment Insurance 7,642,400 $30.5 Supplemental Nutrition Assistance Program (food stamps) Temporary Assistance to Needy Families 26,316,000 $30.3 4,075,611 $11.0 $ Benefit per recipient Bankruptcy in the social insurance system 10

11 Personal Bankruptcy Relative to Other Social Insurance Programs (2007) Program Recipients Dollars Transferred (billions) $ Benefit per recipient Personal Bankruptcy 822,590 $40.9 $49,700 Supplemental Security Income 8,207,780 $41.2 $5,020 Medicaid 56,825,000 $276.5 $4,867 Unemployment Insurance 7,642,400 $30.5 $3,990 Temporary Assistance to Needy Families Supplemental Nutrition Assistance Program (food stamps) 4,075,611 $11.0 $2,700 26,316,000 $30.3 $1,150 Bankruptcy in the social insurance system Bankruptcy in the Federal Statistical System Bankruptcy in the Federal Statistical System 11

12 National surveys with bankruptcy information 1) Panel Study of Income Dynamics filers in main sample (since 1991) filers in Child Development Supplement filers in Child Development Supplement filers in Child Development Supplement 2) Survey of Consumer Finances Retrospective questions from 1998 and on. 3) National Longitudinal Surveys of Youth (1979) ,066 ever filed over 25 years ,245 ever filed 4) National Longitudinal Surveys of Youth (1997) ever filed 5) Survey of Small Business Finances 1993, 1998, and 2003 retrospective question on whether the firm or owner ever filed for bankruptcy Bankruptcy in the Federal Statistical System Bankruptcy data Bankruptcy filings are public information. The 94 bankruptcy courts decide whether to provide its data digitally through the Public Access to Court Electronic Records system. For large downloads, they charge 10 cents per page. Our bankruptcy data 12

13 Our bankruptcy data Gross, Notowidigdo, and Wang (2012) petitioned each of the 94 courts for a fee waiver. All courts except those in Connecticut, Florida, Georgia, New Hampshire, New Jersey, and Texas granted the waiver. Overall they capture 80% of all filings from , with over 11 million bankruptcy filings. Our bankruptcy data Matching to Census Bureau data The bankruptcy data have name, address, and the last four digits of the filer s Social Security Number (SSN). The Center for Administrative Records Research and Applications (CARRA) needs only two of these three to attach a Personal Identification Key (PIK) to the bankruptcy data. The PIK is analogous to a SSN but is internal to the Census Bureau. (It costs money to PIK external data.) Matching to Census data 13

14 Data it will be matched to 2000 Decennial Census of Population 2001-current American Community Surveys (ACS) Survey of Income and Program Participation (SIPP) panels Could eventually also use AHS, CPS, and ilbd. Matching to Census data One key to models The PIK allows us to match to Census data not only in the year of the data but from previous and subsequent years. For person X, we know he filed for bankruptcy in 2006 and appeared in the 2007 ACS, so we know his income in the year after filing. For person Y, we know she filed for bankruptcy in 2008 and appeared in the 2007 ACS, so we know her income in the year before filing. Matching to Census data 14

15 Research Questions: Who files for personal bankruptcy? Fisher (2004) (data from ) Sullivan, Warren, and Westbrook (2000) (data from 1991) Income (mean) $32,100 $20,305 Unsecured Debt (mean) $4,369 $22,588 Education (%) < High school (approx.) High school graduate Some college College Research questions Are there peer effects? 1020 Brickyard Road, Seaford, DE Mobile Gardens Trailer Park 34 bankruptcy filings from this trailer park in our data spread out over the years. 15

16 Who are the missing bankruptcy filers post- BAPCPA? Who was discouraged from filing? Research questions BAPCPA means test The means test was designed to force more filers to chapter 13. The overall chapter 13 filing rate increased a little post-2005 but that masked significant heterogeneity. % filing under Chapter Difference USA Alaska Alabama Connecticut Arizona Maryland North Carolina Georgia Michigan Research questions 16

17 Does having health insurance decrease the likelihood of bankruptcy? Use Medicare eligibility at age 65 (and apply results to the Affordable Care Act?). How did BAPCPA affect foreclosure and bankruptcy in the Great Recession (Li, White, and Zhu, 2011)? How does well-being change before and after bankruptcy? Health; food insecurity; trouble paying bills; more. Research questions Data can be made available to future RDC researchers. I also want to get data from the missing states and for additional years after This will take $. Can we get bankruptcy identifiers added to the public use files? Threat of re-identification? Bankruptcy in the Federal Statistical System Redux 17

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