Monday, March 28, 2011

Bankruptcy on the Rise

The Great Recession’s Impact on Bankruptcy Filings was originally written by Marilyn Bischoff and published in Idaho's Two Cents Newsletter.

The National Bureau of Economic Research reports that the US officially entered into the recession in December 2007, with the recession ending in June 2009. However, those in the insolvency professions would argue that we are still in a recession. How has the recession affected bankruptcy filings for various demographic groups?

The Complete Idiot's Guide to Personal BankruptcyBankruptcy petitioners are not required to disclose age, ethnicity, educational attainment, marital status, or current employment status. The Institute for Financial literacy, which provides bankruptcy prefiling counseling and post-filing debtor education, does collect demographic information from individuals participating in their program. The Institute provides services in-person, by telephone, and online. At the beginning of either service, participants are asked to voluntarily complete a demographic survey. In 2009 more than 52,000 clients volunteered to answer survey questions. The findings challenge some common assumptions about bankruptcy filers. 

Almost 56 percent of bankruptcy debtors are between he ages of 35-54. An emerging tend is that the 55-64 and 65+ age cohorts appear to be experiencing an increased deterioration in the financial conditions and are filing bankruptcy at greater rates than in 2008. Ages 18-24, 2% filing bankruptcy; 25-34, 17%; 35-44, 29%; 45-54, 27%; 55-64, 17%; 65+ 8%.

Educational Background
Bankruptcy rates of individuals with higher education continue to experience lower levels of bankruptcy, but during this recession their rates have increased. This change may suggest that this is a “white collar” recession, perhaps reflecting our economy changing from a manufacturing to a service/ technology base. Educational level: High school/GED degree or less, 42%; Some college or Associate degree, 38%; Bachelor’s degree, 14%; Graduate degree, 6%.

Personal Income
As expected, lower income household are more likely to file for bankruptcy. Those earnings $30,000 or less made up 59% of filers; $30,000- 40,000, 15%; $40,000-$50,000, 10%; $50,000-$60,000, 7%; $60,000+, 9%.

Causes of Financial Distress
The Institute asked clients to pick from a list of common causes of financial distress to self-describe reasons for their current situation. Clients were encouraged to choose more than one cause; therefore, the percentages equal more than 100%. Reduction of income was cited by almost 2/3 of respondents (65%). That, combined with overextended credit (74%), and unexpected expenses (55%), drove most filers over the bankruptcy precipice. Other responses reflect causes commonly cited in other studies: job loss (42%); illness/injury (31%); and changes in household composition: divorce (15%), birth/adoption (10%), death of family member (8%). Interestingly, retirement was cited by 8% of responders.

Source: Linfield, L., December/January 2011. Class of 2009: The Great Recession’s Impact on the American Debtor. American Bankruptcy Institute Journal. Retrieved 12/14/10 Template.cfm?Section=Home&CONTENTID= 62554&TEMPLATE=/CM/ContentDisplay.cfm.

Russ Berrie Ceramic Piggy Bank, BluePatrick's note: I think the biggest thing to learn from this article is not who is going bankrupt, but possibly a key to preventing yourself from going bankrupt. Identify the most danger prone areas and then work to keep yourself out of those areas. Higher education and its corollary, personal income, is a major factor in preventing bankruptcy. However, the causes of bankruptcy demonstrate the wisdom in having a fully funded emergency fund to tide things over when life happens.

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