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

Law and Verdicts

Below are recent stats for employment discrimination jury verdicts. Remember, these only apply if the case actually goes to trial.

In 2007, the median discrimination verdict rose some 70 percent to $252,000 from $147,000 in 2006.

Employers won only 38% of discrimination cases in 2007, prevailing most often in race discrimination cases (43 percent) and losing most frequently in sex discrimination cases (30 percent).

Employers in the manufacturing and industrial sectors had the biggest verdicts, followed by the government, transportation and service sectors.

Source: Employment Practice Liability: Jury Award Trends and Statistics, 2008 report by Jury Verdict Research.

Letter to Miss Manners

It's blast-to-the-past time again. I found another letter I wrote, this time to Miss Manners. She doesn't list the names of people who send in questions, but this one's mine:

SJ Mercury News, November 13, 1999:

Dear Miss Manners:

I am a young adult who is hearing-impaired and consequently wears a hearing aid. I am often approached by curious children of friends and strangers who ask what is in my ear. The "glasses for ears" analogy is getting old, and I wonder if the 4-9 year-old children understand what I'm talking about anyway. Do you have any suggestions as to what I can do when approached by these young people? I have not been able to come up with an answer that successfully satisfies their curiosity and also dissuades them from attempting to touch my ears.

Gentle Reader:

"It's to turn up the volume." If it weren't for the satisfaction of answering your question, Miss Manners would regret that no child will fail to understand this. Your next problem will be what to say when those children ask where they can get these for themselves.

To this day, Miss Manners' advice works for me. It's stunning how she was able to come up with the perfect answer.

Letter from the Past

I am going through my old things and found this letter I wrote way back in 1999. Even then, you could see my libertarian leanings:

San Jose Mercury News, July 25, 1999, 7G:

I never cease to be astounded at how utterly stupid people show themselves to be while judging "moral" content. All the hoopla over "Austin Powers" neglects to see that the movie is a farce that lampoons filmmaking and general society. As such, it isn't meant to be the focus of discussions on the same level as, say, Kantian ethics. If you have something against laughter, stay near your white picket fence and watch a Disney flick with your 2.2 kids--the rest of us will be at the theaters, trembling and writhing on the floor in our moral bankruptcy.

The best part? On the same page is an ad for "Austin Powers, The Spy Who Shagged Me."

War is Hell

The SJ Merc published an interesting letter (1/4/09, 12A) about the current Middle East war:

The similarity between the Native American Indians and the Palestinians is that in the case of both people, lands were taken from them by violence, and their people were decimated so that someone else could establish a new nation on their land. The difference between them is that Native American Indians eventually gave up, accepted their fate and moved to reservations. The Palestinians have never given up, and they still want their land back.

Bob Christensen
San Jose

I am a fervent believer in non-violence, but as an attorney, I also accept the legal principle of self-defense. This principle states:

Use of force is justified when a person reasonably believes that it is necessary for the defense of oneself or another against the immediate use of unlawful force. However, a person must use no more force than appears reasonably necessary in the circumstances.

Force likely to cause death or great bodily harm is justified in self-defense only if a person reasonably believes that such force is necessary to prevent death or great bodily harm.

The following line, from above, strikes me as pivotal: "However, a person must use no more force than appears reasonably necessary in the circumstances." Its essential meaning is that self-defense must be proportionate.

The Gaza Strip, because it is densely populated, presents an interesting moral question. When dealing with one of the most densely populated places in the world, how does a country attack and defend itself proportionately? If it uses ground troops in an effort to avoid indiscriminate bombing, it will sustain more deaths on its side. On the other hand, if it uses air attacks, it will knowingly kill many more civilians than necessary, but with fewer losses on its own side.

Palestine is also presented with difficult moral questions. It appears its neighbor is continuing to annex more Palestinian land through settlements, an action both the U.N. and the U.S. have opposed. Palestine's weaponry is not as sophisticated as its neighbor's, so attacking only military installations would be impossible or futile. If, however, it is completely non-violent, then it will lose more land and civilian lives as Israel builds more settlements and protects those settlements with force. Malcolm X once pointed out that nonviolence isn't always wise: "Concerning nonviolence: It is criminal to teach a man not to defend himself when he is the constant victim of brutal attacks. It is legal and lawful to own a shotgun or a rifle. We believe in obeying the law." (Of course, both Israelis and Palestinians could use this Malcolm X quote to justify their actions.)

In the end, neutral observers are left with a Catch-22 situation. When confronted with a Catch-22 situation, any ethical action must involve extricating both sides from the Catch-22. This means creating an environment where each side has viable options. What makes this goal so complicated is the presence of religion (i.e., Jerusalem) and an absence of products that can create substantial trade.

Palestinians, being generally poor, cannot afford high-margin Israeli products, which are generally marketed to developed countries. While Palestinians can function as laborers for the generally more affluent Israelis, even this potential economic cooperation is complicated because of the limited land in Israel and Palestine. The fact that land is limited creates disincentives for Israel to treat Palestinian workers as anything more than short-term, throw-away workers. Just as Palestinians oppose the building of settlements on their land, Israel will most likely never accept substantial Palestinian immigration or permanent settlement. As a result, Israel is forced to treat Palestinian workers as means to an end, rather than an end in itself. When the best-case scenario violates Kant's rule, we can see why this situation is so complex. (In contrast, America has vast tracts of land and liberal citizenship laws, allowing America to more easily accept and assimilate Mexicans.)

I have always believed economics is the key to any successful relationship, because it causes each side to be useful to each other, which leads to a natural interest in each side's long-term health. After all, one cannot sell products to a dead man, no matter how great the product, or how much money the dead man has.

From my non-expert angle, I see peace only when the following occurs: one, territorial boundaries are firmly established and protected (temporarily) by a strong, neutral third-party; and two, Palestinians become more affluent through trade--which requires them to manufacture products needed in neighboring countries and to be able and willing to trade with Israelis and other neighbors.

Update on January 6, 2009:

A U.N. school has been hit by an Israeli mortar:

http://news.yahoo.com/s/ap/20090107/ap_on_re_mi_ea/ml_israel_palestinians

Also, according to CNN, "A Hamas rocket penetrated farther than ever before into Israel on Tuesday, landing in the town of Gadera, about 23 miles (36 kilometers) north of the Gaza border, the Israeli military said. On Monday, a rocket hit a kindergarten in Ashdod, about 16 miles (26 kilometers) north of Gaza." The school was vacant at the time, so no civilian casualties were reported.

Bombing any densely populated area will knowingly result in civilian casualties. Thus, no matter how civilized a society is, and no matter how much it strives not to target civilians, bombing densely populated areas is an automatically uncivilized course of action. Call me an idealist, but I just can't wrap my head around the concept of "collateral damage." I agree with Mohandas K. Gandhi when he said, "What does it matter to the dead, the orphans, and the homeless whether the mad destruction is wrought under the name of totalitarianism or the holy name of liberty or democracy?"

Idealism aside, the question still remains: "How can the world persuade Hamas to stop firing rockets?" Hamas has agreed to several cease-fires, which shows that it will respond to various incentives. If the British were able to persuade the Irish Republican Army to disarm, especially after bombs like this, there must be a way to persuade Hamas to disarm as well. The alternative is more civilian deaths on both sides, more images Hamas will use to recruit more men, and more pain and suffering on both sides.

Here is one idea to reduce civilian casualties: prior to an attack or war, Israel should offer safehouses on its own soil. All children under 18 years of age and all women would be able to cross the border into the safehouses. These Palestinian residents would be returned after the war or attack was over. I am not an expert on war, but there must be some way to mitigate civilian casualties so that schoolchildren are not at risk.

_________

"I like to believe that people in the long run are going to do more to promote peace than our governments. Indeed, I think that people want peace so much that one of these days governments had better get out of the way and let them have it." -- President Dwight D. Eisenhower

_________

Update on January 8, 2009: Charlie Rose interviewed Bob Simon with a special focus on the Israeli-Palestinian situation. The result is an informative primer for anyone searching for answers on how to improve Israel-Palestinian relations:

http://www.charlierose.com/view/interview/9900

Readers who prefer a transcript rather than video should scroll down and hit the "Transcript" tab (located next to "Comments").

More info: here is a NY Times op-ed, from the Palestinian perspective ("What You Don't Know about Gaza").

Update on January 10, 2010: here is a WSJ op-ed (this link doesn't appear to work, so you may want to google ALAN M. DERSHOWITZ, July 3, 2009, "Has Obama Turned on Israel?"). Dershowitz agrees with and quotes Yousef Munayyer: "'Obama should make it clear to the Israelis that settlers should feel free to grow their families as long as their settlements grow vertically, and not horizontally,'" he wrote last month in the Boston Globe. In other words, build 'up' rather than 'out.'"

Also, here is an interview with Mr. Olmert (NYT, by Ethan Bronner, 9/29/08):

Prime Minister Ehud Olmert said in an interview published on Monday that Israel must withdraw from nearly all of the West Bank as well as East Jerusalem to attain peace with the Palestinians and that any occupied land it held onto would have to be exchanged for the same quantity of Israeli territory.

Steve Nash Video

Although Reggie Miller will always be my favorite NBA player, Steve Nash isn't far behind on my personal list. For those of you who don't follow basketball, the white player is former NBA MVP Steve Nash, who attended Santa Clara University and who plays for the Phoenix Suns. The other player is Baron Davis, who was born in L.A. and who rejuvenated the Golden State Warriors. Wait till you see Nash and Davis street dancing:

http://sports.yahoo.com/nba/blog/ball_dont_lie/post/Video-Gold-Steve-Nash-and-Baron-Davis-are-Step?urn=nba,97409

Oh, the awesomeness.

NY Times and Madoff

Today's NY Times mentions Madoff. Michael Lewis says that Wall Street's misaligned incentives led to corruption.