Causes of Consumer Bankruptcies

Jon P. Nelson, Department of Economics, Penn State University has provided an intense statistical analysis of the factors causing the sharp increase in consumer bankruptcies. Recall that the Bankruptcy Reform Act of 1978 took effect on October 1, 1979. Between 1979 and 1997, annual nonbusiness filings rose from 200,000 to 1.35 million. Over the same period, filings per 100,000 adults increased from 129 to 715.

What accounts for this startling increase in the number and rate of personal bankruptcies? Using data for 1960 to 1995, Nelson concluded that the Act accounted for additional bankruptcy filings of about 72,000 per year and "increased consumer bankruptcies by 36% in the post-act period relative to the pre-act period." However, the Bankruptcy Act of 1978 does not explain all of the dramatic increase in consumer bankruptcies from 1979 to 1995. Over this period personal bankruptcy filings rose 338%. The Bankruptcy Reform Act of 1978 accounts for 36.2% of the 338% rise, or about 11% of the overall increase. To explain the rest of the dramatic change he suggests "economic, financial, legal and social factors." This will be an issue for future research, but at least he has narrowed the field by removing the initial impact of the Bankruptcy Act of 1978. (The complete article may be found in the August 2000 issue of the Journal of Financial Services Research)