Bankruptcy filings have not risen at anything like the rate at which consumer debt defaults have risen since 2007. Part of the explanation may lie in the shadow bankruptcy system, a network of alternative service providers who purport to save debt-burdened consumers from the bankruptcy court. While consumers being sued on delinquent credit cards and mortgages receive solicitations in the mail from bankruptcy attorneys, they are also deluged with a variety of other offers of aid. These range from foreclosure rescue scams to a wide range of legitimate and dubious debt advice and counseling services, to debt elimination and debt settlement schemes. While pondering this post I searched in the usual places for any good empirical data on the number of consumers participating in non-profit counseling, or the number of customers enticed by those who promise to make debt disappear, with no success. We don't seem to know how many debtors go to these debt advice services.
Category: Consumer Bankruptcy
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The Thorne-Porter Financial Education Study
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Last week, a short item was posted on a bankruptcy listserv about the excellent new paper by Deborah Thorne and Katherine Porter, Debtors’ Assessments of Bankruptcy Financial Education, available on ssrn.com. Despite the insights of the paper about the wisdom (or lack thereof) of the requirement of financial management education in bankruptcy and about how to improve the education as long as it remains a condition for bankruptcy discharge, the listserv item (predictably) unleashed a lot of venting by consumer bankruptcy attorneys. I share their pain, but I still feel strongly that the paper is extremely valuable (a dream from a researcher’s point of view, for how much light it sheds).
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Debt Distress: Symptoms and Treatment
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From the United Kingdom comes an interesting new study, based on a survey of more than 10,000 applicants for legal aid about their problems and the means they use to address them. The study explores the linkages between overindebtedness and social exclusion. Consumers seeking help with debt problems are much more likely to face multiple related difficulties, including employment, mental health and other civil justice problems. This longitudinal study also reports on the duration of debt problems and the success or failure of different strategies consumers employed. The findings support the need for a broad array of services to assist consumers overwhelmed by debt, an approach characteristic of many European consumer bankruptcy and debt adjustment systems, about which Jason Kilborn and others have written. These coordinated social service approaches are notably absent from the US bankruptcy system, at least officially, and apart from some token counseling requirements.
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Bankruptcy and the Crisis: Why so Few?
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Many thanks to Bob for the invitation to guest blog here. Those who follow Bob's postings on bankruptcy filing numbers will have seen that U.S. consumer bankruptcy filings have been plodding upwards steadily, but only to roughly where they were before the BAPCPA bubble back in 2005. One of the inscrutable mysteries of the financial crisis of 2007-??, which is after all a housing and consumer debt crisis, has been how few bankruptcies have been filed. Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect.