The 1990s:
A Decade of Declining Stigma to Bankruptcy

Economists David B. Gross of Lexicon and Nicholas S. Souleles of the Wharton School provide further support for bankruptcy reform. In their paper delivered to the American Economics Association's annual meeting in January of this year, they explored the reasons for the burst of bankruptcies between 1995 and 1999. Their research was based on a detailed study of about 300,000 new credit card accounts. A detailed statistical analysis of these data showed that the sharp rise in filings was not explained by looser credit standards during the period, although standards did change. Even after adjusting for some increased acceptance of risk, bankruptcy filings still rose significantly. As reported in Business Week, "Gross and Souleles attribute the trend to lower 'social stigma' in filing for bankruptcy." They believe that shame lessened because of the increased information about personal bankruptcy, much of it provided by a greater volume of advertising by bankruptcy attorneys. The effects of advertising were supplemented by a decline in the shame of filing for bankruptcy. As the authors observe, " the scarlet letter associated with bankruptcy is disappearing."

Despite the decline in stigma, bankruptcies dropped during the economic boom of the late 1990s. The authors predict an increase in filings with the slowing of the economy. Their predictions are supported by recent data from Visa International showing that in the first 11 weeks of 2001, filings were up 20 percent over the same period last year.