Encyclopedia of Sociology

BANKRUPTCY AND CREDIT

rates that seem to follow the business cycle. Some
analysts believe that bankruptcy is a lagging indica-
tor; that is, some months after an economic slow-
down, bankruptcies begin to rise as laid-off work-
ers run out of resources or small business owners
find they cannot remain in business.

Each bankruptcy affects at least one house-
hold, and one estimate puts the average number of
creditors affected at eighteen. Some creditors,
such as credit card issuers, are affected by numer-
ous bankruptcies within a single year. Some bank-
ruptcies initiate a chain of events: The bankruptcy
of a single business may lead later to the bankrupt-
cies of employees who lost their jobs, of creditors
whose accounts receivable were never received,
and of suppliers who could not find new custom-
ers. Creditors often argue that the rising numbers
of bankruptcies cause them costs that are then
passed on to all consumers in the form of higher
interest rates.

A bankruptcy may be filed either by a single
individual or jointly by a couple. Since the early
1980s, there has been a sharp increase in the
proportion of bankruptcies filed by adult women.
Several studies indicate between one-third and
one-half of bankruptcies are now filed by women.
Over half of bankrupt debtors are between the
ages of thirty and fifty. Their mean occupational
prestige is approximately the same as that of the
labor force as a whole, and their educational level
is also similar to that of the adult population. The
proportion of immigrants in the bankrupt popula-
tion is approximately the same as their proportion
in the general population. There are conflicting
findings about the extent to which minority popu-
lations are overrepresented or underrepresented
in bankruptcy. Despite their educational and occu-
pational levels, however, the median incomes of
bankrupt debtors are less than half the median
income of the general population.

CAUSES OF BANKRUPTCY

Much of what social scientists know about bank-
ruptcy comes from reviewing the bankruptcy peti-
tions filed in courts, and from interviewing judges,
lawyers, clerks, and others who work in the bank-
ruptcy courts. Information about the causes of
bankruptcy, however, typically comes from inter-
views with the debtors themselves. Because many

debtors are ashamed of their bankruptcies, and

because American debtor populations are geo-

graphically mobile, interview studies often have

somewhat low response rates. For learning the

cause of a bankruptcy, however, there is probably

no substitute for asking the debtor.

Debtors often report ‘‘inability to manage mon-

ey’’ or ‘‘too much debt’’ as the reason for their

bankruptcy. In probing a little deeper, however,

researchers have found five major issues involved

in a large fraction of all bankruptcies: job prob-

lems, divorce and related family problems, medi-

cal problems, homeowner problems, and credit

card debts.

Many debtors have been laid off completely,

lost overtime, or had their hours of work or their

pay rates reduced. Some debtors have had long

periods of unemployment; others have lost their

jobs because of the closure of the plant or the store

where they worked. The job loss causes an unplanned

loss of income, and this fact in turn often creates a

mismatch between the petitioner’s debt obliga-

tions and the ability to meet those obligations.

During the recession of the early 1990s, when

many industries were downsizing and otherwise

restructuring their labor forces, about two in every

five bankrupt debtors reported a job-related rea-

son for bankruptcy.

Divorce and other family problems may result

in lower incomes for the two ex-spouses (especially

the ex-wife). Moreover, in most divorce settle-

ments the debts are also divided, and the debt

burden may be too great for one of the ex-spouses.

Sometimes an ex-spouse will file bankruptcy know-

ing that any jointly-incurred debts discharged by

the bankrupt spouse will have to be paid by the

other ex-spouse. Although alimony and child sup-

port cannot be discharged as debts, for custodial

parents who do not receive the payments the

financial consequences may be grave. Similarly,

for parents who must make the payments, a reduc-

tion in other debts may make the payments more

possible. Finally, it is harder to support two house-

holds on the income that used to support just one

household. For all of these reasons, the recently

divorced may find themselves in bankruptcy.

Medical problems may lead to higher debts if

the debtor is uninsured or if insurance is insuffi-

cient to pay for needed medical procedures, phar-

maceuticals, and professional services. Medical