Bankruptcy Is Failure MacroMonitor Marketing Report Vol. V, No. 3 April 2001

Recently, the House and the Senate both passed revisions to the bankruptcy laws that will make it more difficult for people to erase their debts by declaring bankruptcy. Among the reasons that the House and Senate cited for these revisions was some people's abuse in order to hide assets or avoid paying their debts. Specifically, they cited the use of the home to hide assets. But how many households that declare bankruptcy have significant assets in their homes? What is the distribution of their debt among unsecured and secured instruments. In short, are people who typically declare bankruptcy abusing it?

A Decade of Bankruptcy

A Decade of Bankruptcy

MacroMonitor data from the past ten years show no discernable trend in the incidence of households declaring bankruptcy. The 1.8 million measured in the 2000­01 MacroMonitor lines up very closely with the numbers that the press reported (even though it is based on only 46 unweighted cases). In spite of the small sample, it is interesting to explore some of the characteristics of these households from the breadth of the MacroMonitor.


Demographics

Households that have declared bankruptcy recently (or indicate that they may do so in the near term) tend to have household heads between 40 and 54 years old. Virtually none of them have annual incomes over $100,000, and they tend to cluster in the less-than-$20,000 area. They appear to be dual-headed, married households more often than single and are more likely to have dependent children. Half of these household heads have a high school diploma or less education, and only 12% have a college degree or more, compared with 26% for all U.S. households. These households are more likely to be Boomers and in the low or low-middle socioeconomic stratum.


Financials

As one might expect, these bankruptcy households are less likely to have any form of assets and have much lower amounts in these instruments. Only half of them are homeowners (compared with more than two-thirds of all U.S. households), and the mean value of their homes is only $67,000. More than half (54%) of all homeowners' primary homes are valued at more than $100,000, compared with slightly more than a quarter (27%) of bankrupt households' homes. And 22% of all U.S. households have at least $150,000 in available real estate equity, versus none of the bankrupt households.

With respect to debt, bankrupt households are more likely to continue to owe on their homes, vehicles, and even consumer loans, but less likely to owe on credit cards. And the amounts owed reflect the bankrupt households' circumstances—lower amounts on their homes (they could not afford more expensive homes), higher on their vehicles (collateralized and necessary for keeping a job), and lower on their consumer loans and credit cards (poor qualification would restrict the credit limits). Households anticipating bankruptcy owe more on their homes and credit cards.


Attitudes

Households that recently declared bankruptcy recognize that they have trouble sticking to budgets, don't enjoy dealing with their finances, and are not satisfied with their financial situation. They are concerned about "just keeping up" and are looking for help wherever they can find it. They want their finances to be simple, low cost, and consolidated. They have many negative feelings toward financial institutions and are concerned about their debts. Interestingly, they have positive feelings toward insurance and automatic savings programs.

Those households anticipating declaring bankruptcy differ from those that have already done so in several interesting ways. Although they share concerns about just keeping up, maintaining a budget, finding the lowest costs, and finding a single provider, they are not as negative toward financial institutions. They are not as receptive to expert advice or outside help. They have even more concern about their debts but are not as receptive toward life insurance. They may realize that they need help, but are less likely to ask for it or accept it if it is offered. They still harbor some hope that they can be active in investing, in spite of the fact that they are in dire straits.


Summary

Although the sample sizes are small, no indication from the MacroMonitor suggests that those households that have declared or are likely to declare bankruptcy intend to manipulate those laws to their advantage. Instead, they are apparently legitimately concerned about their situation and are interested in taking steps to correct it. They need and want help from any quarter but harbor some ill-will toward financial institutions. No indication suggests that the current laws are not functioning properly. Given the income and level of debt among households that have declared bankruptcy, the recent changes in the bankruptcy code may serve only to exacerbate these households' situation, increasing the number of households at risk and the potential for keeping them insolvent and pushing them toward homelessness.

In short, most households that have declared or plan to declare bankruptcy realize that it is a form of failure—an admission that they have not been able to remain solvent and keep their heads above water—many times the result of bad luck as much as bad decisions. Although ultimately the responsibility of avoiding bankruptcy falls on the household, some of society's other stakeholders share in the blame. Financial institutions, regulatory agencies, consumer associations, and others all provide some training, counseling, and remedial programs, but they could try to identify problems and intervene earlier to avoid bankruptcy. Schools, religious organizations, and parents have a role to play in teaching teens and adolescents how to save, budget, and use credit wisely, before they get into trouble. And all intermediaries who provide financial products, services, and advice need to be sensitive to their clients' total situation when making recommendations.