The Failure of Bankruptcy's Fresh Start
63 Pages Posted: 3 Apr 2006
An untested assumption of Chapter 7 bankruptcy is that it rehabilitates debtors for a fresh start in the economy. Using original, longitudinal data, we examine this assumption against the realities of life after bankruptcy. Our findings challenge the fresh start as the theoretical underpinning for consumer bankruptcy relief. We found that just one year after bankruptcy, one in four debtors was struggling to pay routine bills, and one in three debtors reported an overall financial situation similar to, or worse than, when they filed bankruptcy. Our analysis of these data demonstrates that steady and sufficient income is the key to improved post-bankruptcy financial health. Factors that cause household income to decline, such as unemployment and underemployment, illness or injury, and old age, undermine the chances of financial recovery. These data reveal the limitations of bankruptcy as a social safety net and highlight the fragile economic situations of American families. We conclude that bankruptcy is an incomplete tool to rehabilitate those in financial distress, and we suggest adjustments to bankruptcy law and social programs that will improve the ability of consumers to achieve a fresh start after financial failure.
Keywords: Bankruptcy, consumer bankruptcy, consumer credit, fresh start, consumer debt
JEL Classification: K29
Suggested Citation: Suggested Citation