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The Bankruptcy Solution

posted by Elizabeth Warren

What problem does bankruptcy solve?  It gets rid of some debts.  It gives a debtor a chance to deaccelerate a home mortgage.  It provides a framework for renegotiating a car loan.  It stops collection calls.  But does it put the debtor back on her feet?  In other words, after we have performed the magic incantations of bankruptcy, what happens to the families that were in terrible trouble?

In the first-ever detailed, empirical study of post-bankrupt families, CreditSlips' own Katie Porter and Debb Thorne provide an answer to that question.  (Katie and Debb are much too modest to toot their own scholarly horns here, so I'll talk about the piece without their advance knowledge.) 

They ask how many families are managing their post-bankruptcy bills reasonably well, and the answer is not good.  A year after bankruptcy, about one in four families was struggling to pay basic expenses.  The likelihood of post-bankruptcy recovery was tied to reasons for filing.  When debtors had serious income problems from unemployment, medical problems or old age, they were far less likely to be among those successfully rehabilitated in bankruptcy. 

As Katie and Debb point out, the data are a reminder that bankruptcy is not a complete social safety net; it must work in concert with other protections such as income security.  The data also highlight the fragile economic situations of many American families.

The piece is a stunner, and yet, at some level, I think it confirms something we feared.  Many of the people who come to bankruptcy courts looking for relief are in desperate shape, and the help we can offer is very limited.


"the data are a reminder that bankruptcy is not a complete social safety net; it must work in concert with other protections such as income security."

There is no such thing as income security. This is a market economy.

Ah, since this is supposed to be a "market economy," then why do we have bankruptcy at all? Devil take the hindmost.

Though bankruptcy is not the solution to all problems at all times, it does relieve consumers of oppressive debts that they will never be able to pay. Taken together with sound budgeting and income security, bankruptcy can do wonders for a household's financial stability. It is the role of the consumer bankruptcy lawyer to counsel clients not only on the effects of bankruptcy on debt levels, but also on ways to be wiser with money overall.

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