CHAMPAIGN, Ill. - Bankruptcy filings by American households are likely to return to the levels they were at before Congress passed a law last year aimed at curbing "abusive" filings, a statistical study by a University of Illinois expert indicates.
In an upcoming paper in the American Bankruptcy Institute Journal, Charles J. Tabb, a professor at the Illinois College of Law, examines bankruptcy filing rates in order to provide "some hard data to replace the guesswork" about why debtors file for bankruptcy.
"While several studies examined these questions prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there remains considerable uncertainty and debate over what economic factors correlate to consumer bankruptcy," Tabb wrote.
He looked at bankruptcy filings from July 1979 through June 2006 and analyzed what economic data correlated best with filing rates. He concluded that the steep decline in bankruptcy filings after the new law went into effect last October will likely be reversed, and the number of filings will return to the levels of recent years.
Even though the new law requires a means test for filers and drives up legal costs for consumers, it does not address the core reason why American households seek court protection for the discharge of their debts, according to Tabb. "The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."
Tabb said the majority of filers are not scofflaws but people who face overwhelming costs or lost income through divorce or job layoffs. Many personal bankruptcies are filed by single women and single-adult households.
The most rapid increase in bankruptcy filings took place between 1985 and 1997, when filings quadrupled from under 300,000 to 1.26 million a year. Since then, yearly filings have grown by only 3 percent - from 4.717 to 4.872 filers per 1,000 population.
"Looking at this filing history, one wonders whether Congress was responding to a supposed 'crisis' almost a decade after the 'crisis' had passed," Tabb wrote.
A major indicator of the level of yearly filings is the amount of outstanding U.S. revolving consumer debt.
After increasing four-fold between 1983 and 1998, total outstanding revolving credit (mostly credit-card debt) leveled off after 1999 and has dropped since 2002. "We may be approaching a market saturation point; there may be few untapped candidates for credit cards out in the marketplace," the Illinois expert said in an interview.
But home-mortgage debt rose by more than 50 percent between 2000 and 2005, and, like revolving credit, is correlated with the incidence of bankruptcy filings. "If Congress wants to drive down bankruptcy filings, it needs to take steps to drive down consumer debt burdens. Otherwise, bankruptcy filings will remain high," Tabb concluded.
His paper is scheduled to appear in the November issue of the American Bankruptcy Institute Journal.