Encyclopedia of Sociology

BANKRUPTCY AND CREDIT

problems may at the same time lead to lower
incomes if a person is too ill or injured to work.
Either way, a spell of illness or an automobile
accident may push a previously solvent person
into a situation in which debts are no longer
manageable. Medical problems rise in frequency
as a reported cause of bankruptcy for adults aged
fifty-five to sixty-four, years in which medical prob-
lems may increase but before Medicare coverage
becomes available.

Earlier efforts to examine medical debts as an
indicator of the causes of bankruptcy showed medi-
cal debt to be a fairly insignificant cause, whereas
direct interviews of debtors are more likely to
reveal medical issues as causative. There are rea-
sons to believe that the debt indicators underesti-
mate this reason for bankruptcy. Insurance will
often pay medical providers but will not replace
income, so that debts to hospitals or physicians
might not appear in the records even though the
illness or injury is nevertheless the reason that the
debtor cannot repay debts. Moreover, some medi-
cal providers accept credit cards, so that the medi-
cal expenses are hidden within credit card debt.
And some debtors will make efforts to pay off their
medical creditors first for fear of being denied
services. On the other hand, there may be some
overestimate of the impact of medical issues in
interviews, because respondents may believe a
medical reason may be seen as a socially accept-
able cause for bankruptcy.

Bankrupt debtors are somewhat less likely to
be homeowners than the general population, but a
substantial number of homeowners file for bank-
ruptcy, often to prevent the foreclosure of their
mortgage. Chapter 13 permits homeowners to pay
the arrearages (missed payments) on their mort-
gage along with their current payments. Home
ownership may also be an issue for a worker who is
transferred to a different city and buys a second
home before the first home is sold. Equity is the
portion of the home’s value for which the home-
owner has made payment. The recent prolifera-
tion of home-equity loans, which allow homeown-
ers to use the equity in their homes as collateral,
has also put homes at risk even if the payments on
the principal mortgage are current. Small business
owners are often required to use their homes as
collateral for business loans, which means that a
failing business may also entail the threat of the
family losing its home. Home-equity lending is

being extended to a number of other situations,

including college loans and credit cards, with the

result that many Americans are risking their homes,

often without realizing it.

A final reason for bankruptcy is large credit

card debts, often at high rates of interest. All-

purpose cards (such as Visa, MasterCard, and

American Express) are now used for many con-

sumption purposes, including payment of federal

income taxes, payment of college tuition, and

many goods and services, with the result that

credit card debt is assumed for many different

purposes. Most ordinary living expenses can now

be charged with a credit card, so that interpreting

a high credit card debt is difficult. High rates of

interest accelerate the credit card debt quickly.

Credit card debt is the fastest-growing reason for

bankruptcy being given by debtors.

BANKRUPTCY MYTHS

Empirical studies have refuted a number of myths

about bankruptcy. One such myth is that some

people file for bankruptcy again and again. Several

studies have been unable to confirm this myth, but

there are a number of people who are unsuccess-

ful at Chapter 13 who eventually file Chapter 7.

These people have not really repeated bankruptcy,

because they have never received a discharge from

their debts in their Chapter 13 filings.

Another myth is that large numbers of bank-

rupt debtors have high debts because of alcohol-

ism, drug abuse, and gambling. Although most

empirical studies have identified a few isolated

cases in which one of these problems plays a role,

the great increase in bankruptcy numbers cannot

be attributed to a great increase in addictive

behavior.

A third myth is that there is widespread abuse

of the bankruptcy process because many debtors

could allegedly pay all of their debts. Most studies

of the repayment possibilities for the debtors find

that the debtors are unable to repay their debts,

even if their families live on very modest budgets

(such as the model low-income budget of the U.S.

Bureau of Labor Statistics). The few studies that

have found debtors able to repay have often elimi-

nated from repayment whole categories of debt

that the debtors themselves cannot eliminate. There

are, however, documented cases of fraudulent or