What is some research on the benefits of bankruptcy?

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If you’re interested in the research around how bankruptcy helps low-income Americans, here are seven articles you should reach. The articles discuss how bankruptcy improves credit scores, employment outcomes, and future earnings. They also mention how bankruptcy stops wage garnishment and serves as a lifeline for people trapped in a cycle of poverty.

Written by Attorney Jonathan Petts.  
Updated August 10, 2020


If you’re interested in the research around how bankruptcy helps low-income Americans, here are seven articles you should read. The articles discuss how bankruptcy improves credit scores, employment outcomes, and future earnings. They also mention how bankruptcy stops wage garnishment and serves as a lifeline for people trapped in a cycle of poverty.

(1) What happens when you can’t afford to go bankrupt

Key takeaway: “For the past year, I’ve traveled the country trying to understand why bankruptcy often fails those it’s supposed to help. I analyzed millions of filings and interviewed dozens of judges, lawyers and people struggling with debt. The answer turns out to be simple: People are too broke to go bankrupt....Studies show clear benefits for those who successfully wipe out their debts, from higher credit scores to higher incomes. Moreover, this sort of targeted relief can help buoy the broader economy.”[1]

(2) The impact of personal bankruptcy on labor supply decisions

Key takeaway: Chapter 7 filers on average increase labor supply by 12.3%.[2]

(3) Millions Of Americans' Wages Seized Over Credit Card And Medical Debt

Key takeaway: Millions of Americans see their wages garnished each year due to unsecured debts that would be wiped away in bankruptcy, immediately increasing salaries by up to 25 percent.[3]

(4) Why Don’t More Households File for Bankruptcy

Key takeaway: 15-22% of American households would benefit from filing, which tells us tens of millions of Americans remain unserved in financial distress. This article remains the leading study on the market size for bankruptcy.[4]

(5) Insolvency after the 2005 Bankruptcy Reform

Key takeaway: “Both one and four quarters after bankruptcy, the credit scores of the individuals who go bankrupt are considerably higher than those of the newly insolvent who do not go bankrupt.” $200,000 is the approximate amount people with a low credit score will pay in interest and fees over the course of their lives.[5] (MSN Money)

(6) Life in the Sweatbox

Key takeaway: People who cannot afford to file for bankruptcy “deal with persistent collection calls, go without healthcare, food, and utilities, lose homes and other property.”[6]

(7) How the Bankruptcy System Is Failing Black Americans

Key takeaway: Black Americans struggling with debts are far less likely than their white peers to gain lasting relief from bankruptcy.[7]


Sources:
  1. ProPublica. (2018, March). What happens when you can’t afford to go bankrupt. Washington Post . Retrieved August 7, 2020, from https://www.washingtonpost.com/outlook/what-happens-when-you-cant-afford-to-go-bankrupt/2018/03/02/343fd882-1d8e-11e8-9de1-147dd2df3829_story.html
  2. Review of Economic Dynamics. (2017, October). The impact of personal bankruptcy on labor supply decisions. Volume 26. Retrieved August 7, 2020, from https://www.sciencedirect.com/science/article/abs/pii/S1094202517300236
  3. NPR & ProPublica. (2020, September). Millions Of Americans' Wages Seized Over Credit Card And Medical Debt. Morning Edition. Retrieved August 7, 2020, from https://www.npr.org/2014/09/15/347957729/when-consumer-debts-go-unpaid-paychecks-can-take-a-big-hit
  4. University of Michigan. (1998, October). Why Don't More Households File for Bankruptcy?. The Journal of Law, Economics, and Organization, Volume 14, Issue 2. Retrieved August 7, 2020, from https://econweb.ucsd.edu/~miwhite/white-jleo-reprint.pdf
  5. Federal Reserve Bank of New York. (2015, April). Insolvency after the 2005 Bankruptcy Reform. Staff Report No. 725. Retrieved August 7, 2020, from https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr725.pdf
  6. University of Illinois College of Law Legal Studies. (2018, February). Life in the Sweatbox. 94 Notre Dame Law Review 219 (2018). Research Paper No. 18-21. Retrieved August 7, 2020, from https://ssrn.com/abstract=3126901
  7. ProPublica. (2017, September). How the Bankruptcy System Is Failing Black Americans. The Atlantic. Retrieved August 7, 2020, from https://features.propublica.org/bankruptcy-inequality/bankruptcy-failing-black-americans-debt-chapter-13/

Written By:

Attorney Jonathan Petts

LinkedIn

Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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