The Market for Deadbeats

Amid the ongoing furor over proposed amendments to bankruptcy legislation, it is useful to consider an article with the title shown above that was written by Margaret F. Brinig and F. H. Buckley and published in the Journal of Legal Studies in January 1996. Essentially, the authors presented a theory that the states attempt to attract value-increasing immigrants and to deter "welfare- or tax-loving immigrants." Consistent with this basic theory, "States compete for high human capital debtors by offering them a fresh start from out-of-state creditors." It is a win-win situation for the states' residents. The value-increasing migrants attracted may owe few if any creditors within the state, but bring a variety of valuable talents and other assets to the state. This is not a new issue. Recall that in the early days of the colonies, many of the settlers were deadbeats fleeing debtors' prison in England and other countries. And, when their new creditors sought to collect overdue debts, they sometimes found them gone, with "GTT" marked on their front door—Gone to Texas.

The first basic theory to be tested was whether migration flows reflected state-to-state variations. To test their theory the authors obtained data on interstate migration from the Census Bureau for 1985-1990. At the time the research was conducted these were the most current data available. By 1990, a total of about 21.6 million Americans were living in different state than they had lived in five years earlier. The authors used a number of variables to test their theory. Essentially, they considered factors that would encourage a citizen to migrate from, State A to State C. For example, a long trip would deter migration. Hence, they considered the driving distance between the capitals of States A and C. To reflect the possibility that migrants might be seeking an improvement in climate, they included as a measure of temperature "the average January high temperature from 1961 to 1990 in the largest city in each state. Nine variables were used to test for the effect on migration rates of state bankruptcy statutes.

They concluded from their very detailed analysis that economic factors such as distance to travel, and gross state product, explained "very little of the state-to-state variation in Chapter 7 filing rates from 1985 to 1990. Only the unemployment factor was significant and positively related to filings for Chapter 7. Having ruled out most economic factors that might contribute to Chapter 7 filings, they concluded: "the Chapter 7 variable is primarily a deadbeat one."

In the second part of the report, the authors tested a number of other possible explanations of variations in Chapter 7 filings among the states. Would not we expect filing rates to drop during a period of prosperity? Not so. "The three-fold run up in filing rates largely overlapped with the 7 fat years of the Reagan recovery." However, the authors did find that filings for Chapter 7 were positively and significantly related to divorce rates, Aid to Dependent Children (AFDC) and unemployment. The relationship between divorce rates and unemployment to Chapter 7 filings seems clear. The promise of AFDC payments might "make bankruptcy more attractive."

Their conclusion: "In deadbeat theories, states compete for high human capital debtors by offering them a fresh start from foreign creditors. In our model, deadbeat and tax variables are found to be significantly correlated with migration flows, supporting deadbeat and vote-seeking migration theories." To put their conclusions into another context, we note that the principal feature that attracts debtors to Chapter 7 in Texas is also consistent with the features that attract debtors in general to Chapter 7.