Bankruptcy Among Low- and Moderate-Income Households

To the organizers of Credit Slips, thank you for inviting me to guest blog this week. Bob Lawless asked me to focus on aspects of my empirical research regarding the financial services lives of low- and moderate-income (LMI) households. In this first posting, let me just begin to introduce the data.

With the Survey Research Center at the University of Michigan, I conducted an in-person survey of a random, stratified sample of more than 1,000 LMI households in the Detroit metro area. The surveys averaged about an hour and 15 minutes and covered a broad range of financial services behaviors, preferences and attitudes. Our response rate was 65%. Among the LMI households in our study, the median household income was $20,000. About a third of these households lived below the poverty line and 29% lack a checking or savings account.

Among LMI households, nearly 4% reported that they had filed for bankruptcy last year, significantly higher than the national average for 2005-2006, and somewhat higher than the Wayne County average.  Some 15% of households have filed for bankruptcy at some point in the their lives, and 1% of households have filed more than once.

Because the study involves a random sample of LMI households, we can compare those who have filed for bankruptcy and those who have not filed. On many dimensions, these groups are similar. They are equally likely to be black or female, and the average age in these two groups is the same. However, those who have filed for bankruptcy are more likely to have greater than a high school diploma than those who have never declared bankruptcy. Filers' median income of $28,000 is $10,000 higher than those who have never filed. Filers are also 9 percentage points more likely to be separated, widowed or divorced than those who have not filed; we do not have data on the time periods for changes in marital status and cannot relate these to the timing of bankruptcy.

Overall, filers are more likely to have higher asset holdings, as well as some form of debt, more sources of debt, and higher median levels of indebtedness than non-filers. Filers are nine percentage points more likely to hold credit card debt, four percentage points more likely to have mortgage debt,seven percentage points more likely to have unpaid medical debt, and over ten percentage points more likely to have outstanding student loans.

We measure a range of financial hardships experienced by respondents in the 12 months prior to the interview, including major medical expenses, food insecurity, eviction, utilities and telephone cut off, and threats of foreclosure. Hardships are widespread among LMI households. Over 60% of respondents report experiencing at least one hardship over the last year. About 27% report a major medical expense; 17% report not having enough food to eat; 18% report having their phone disconnected; 10% had their utilities cut off; 6% were evicted; and 3% were threatened with foreclosure.

Bankruptcy filers were more likely to experience most of these hardships. Of those who declared bankruptcy in the last year, 100% report having experienced one or more of these hardships in the last 12 months. Nearly 37% experienced job loss and nearly 30% had major medical expenses. Twenty-two percent went hungry; 24% reported having their phone disconnected; 23% had their utilities cut off; 18% were evicted; and 3% threatened with foreclosure.

While hardship, job loss and marital status differ significantly across filers and non-filers, unobserved factors may account for differences across these groups as well.

Comments

[John Pottow]

Can you draw an inference based on the marked difference in hardship experiences? That is, it looks to me like when the "struggling" cross the threshold into the "miserable" (based on admittedly group averages of hardship responses), that might be when they file?