Showing posts with label Bankruptcy. Show all posts
Showing posts with label Bankruptcy. Show all posts

Monday, January 5, 2009

Bankruptcy Filings Show Consumer Overspending

UC Davis Magazine (Winter 2009) published an interesting study on bankruptcy filings:

Simple overspending has driven most personal bankruptcies in recent years, a change from previous decades when illness and unemployment were major factors, concludes a new study from the University of California, Davis, Graduate School of Management.

"The reasons people file for personal bankruptcy indeed have shifted during the past couple of decades," says Ning Zhu, the study's author and an associate professor of management at UC Davis. "Although our research supports the notion that adverse life events, like losing one's health or job, contribute to personal bankruptcy filings, excessive consumption contributes more to the recent increase in personal bankruptcy filing."

According to the American Bankruptcy Institute, 2,039,214 personal bankruptcies were filed in 2005, up nearly five-fold from the 412,510 bankruptcies filed in 1985. Indeed, personal bankruptcies jumped from 0.3 percent to 1.8 percent of all U.S. households during the same period.

The UC Davis study looked at all personal bankruptcy filings in Delaware in 2003, because the state was among the first to make its bankruptcy filings available through the Public Access to Court Electronic Record system and its demographics closely resemble those nationwide. The year 2003 was chosen because it allowed the study to follow cases to their conclusion, and permitted observation of filing patterns before 2005. (Filings may have been accelerated in the months leading up to October 2005, when the federal Bankruptcy Abuse Prevention and Consumer Protection Act took effect, by households wanting to avoid the new act's stricter requirements.)

So that he could compare bankrupt households with solvent ones, Zhu also collected information from the Federal Reserve Board's national Survey of Consumer Finance about households that had never declared bankruptcy.

Overall, Zhu concluded that debt accounted for more than 50 percent of recent bankruptcies, while medical problems caused just 5 percent and unemployment led to only 13 percent.

Zhu found that bankrupt households have bigger mortgages, car loans and credit card balances than solvent ones, but make less than half as much money.

Among bankrupt homeowners, mortgages were 3.21 times higher than annual household income, versus 1.73 times for solvent households. Auto loans were double the annual income for bankrupt households, versus 0.4 times for solvent households. And bankrupt households carried credit card balances that almost equaled their annual household income, while the average credit card balance for solvent households was 6 percent of annual income.

In addition, bankrupt households had a median annual income of $25,738, versus $43,341 for solvent ones. (The median is the midpoint in a set of values; a median income of $25,738 for bankrupt households means that half of the bankrupt households in the study made higher salaries and half made less).

Interestingly, more than 5 percent of bankrupt households owned at least one luxury automobile (average age of the car was 7 years), compared with 8 percent of solvent households (average age was 8 years).

The study also suggests that some Americans deliberately spend beyond their means with the intention of using the bankruptcy system to erase some or all of their debt, and recommends reforms to discourage such abuse.

"Our results emphasize that bankruptcy law reform should aim to address the issue," Zhu writes. "Current means test focusing on income, rather than consumption patterns or adverse events, may not set the best criteria for sorting out the households who truly need bankruptcy protection from those that consume beyond their means to take advantage of the system."

The research has been presented at Boston College, the Massachusetts Institute of Technology, UCLA and Yale, and will be published in an upcoming issue of the Journal of Legal Studies, a publication of the University of Chicago Law School. The working paper is online at [PDF file]:

http://www.gsm.ucdavis.edu/Faculty/Zhu/PersonalBankruptcy [PDF file]

Zhu earned his doctorate in finance from Yale in 2003. He specializes in individual behavior in financial markets, bankruptcy and distress, and investments.

Media contacts:

* Ning Zhu, Graduate School of Management, (852) 9848-2096, nzhu@ucdavis.edu (Ning is on sabbatical in Hong Kong; note time difference when calling his cell phone.)

* Tim Akin, Graduate School of Management , (530) 752-7362, tmakin@ucdavis.edu


* Claudia Morain, UC Davis News Service, (530) 752-9841, cmmorain@ucdavis.edu

Thursday, November 20, 2008

Public Sector Costs and Benefits

Rio Vista, California is yet another morality tale about how government spending, which includes public sector benefits, has spun out of control:

Link1 [replaced dead link]

Link 2 [replaced dead link]

In Vallejo, CA, another city that had to file bankruptcy, police and firefighter unions tried to force the city out of bankruptcy court so they could preserve their own government benefits--at the expense of the general taxpayers. How many more California cities have to go bankrupt before our government starts protecting taxpayers from unreasonable government spending, which includes comparatively much higher salaries and benefits in the public sector? (See Malanga article for comparison of private vs. public employees)

The costs of pensions and lifetime health care benefits depend on employees' lifespans and are difficult to estimate, because some employees may live longer or may need care that far exceeds the estimated costs. As a result, it's very difficult to ascertain employee pension liabilities because so many unpredictable factors are involved. Inevitably, because of the uncertainty involved in calculated how many years a public employee has to be paid after retirement, the government will have under-funded pensions. The result is that the taxpayers--and our children--will suffer as a result of the government continuing to provide itself with generous and hard-to-estimate benefits. Almost no private sector employees receive pensions anymore because companies figured out they shouldn't be in the insurance business. If a voluntary 401(k) or 403(b) plan is good enough for most engineers, nurses, and lawyers, why isn't it acceptable for government workers, firefighters, and police officers? Who exactly is the government protecting and serving?

Monday, November 10, 2008

GM's Woes

The AP has finally reported that GM might be going bankrupt: AP Story on GM

The press, as usual, is slow to catch on. I predicted GM's bankruptcy last year, in a letter to The Metro: [Metro Letter]

[A]lmost no one in the private sector receives pensions or lifetime medical benefits, and all the private companies who used to offer such benefits, such as General Motors and Ford, are changing their policies and are slowly going bankrupt.

I hope Lee Iacocca was wrong when he (reportedly) said, "As goes General Motors, so goes the nation." But Mr. Iacocca seems to be blessed with accurate foresight--see Where Have All the Leaders Gone?, published May 2007:

Am I the only guy in this country who's fed up with what's happening? Where the hell is our outrage? We should be screaming bloody murder. We've got a gang of clueless bozos steering our ship of state right over a cliff, we've got corporate gangsters stealing us blind, and we can't even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, "Stay the course." Stay the course? You've got to be kidding. This is America, not the damned Titanic. I'll give you a sound bite: Throw the bums out!

It's just a little bit of history repeating...