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What's Behind All the Credit Card Debt Discharged Through Bankruptcy?

posted by Pamela Foohey

Monday was our last day of classes. This semester I taught a seminar about the role of consumer credit in the United States' economy and society through the lens of consumer bankruptcy (primarily utilizing data and papers from various iterations of the Consumer Bankruptcy Project; find info about the seminar, which was designed by Katie Porter, here). Fittingly, the final project was to write a proposal for an empirical study of an important and under-studied issue regarding consumer credit and/or bankruptcy. A couple students honed in on the lack of research regarding the make-up of credit card debt that debtors seek to discharge through bankruptcy. Is the debt incurred for everyday necessities, such as groceries and gas to drive to work? Is a sizable portion for medical expenses? Or is the debt incurred for 3D televisions, designer suits, and other luxuries?

The students' proposals were a bit broad (admittedly because I let them be a bit fanciful), and called for reviewing all of debtors' credit card statements for the three years prior to filing and conducting extensive interviews with debtors to tease out the nature of the expenses behind the thousands of dollars in credit card debt that the average consumer seek to discharge. Coincidentally, the day that some of my students presented their proposals, Amy Traub (from Demos) came out with a new study titled "The Debt Disparity: What Drives Credit Card Debt in America." The study relies on a survey of 1,997 low and middle-income households, half of which carry credit card debt and half of which do not. The study doesn't answer my students' ultimate question, but the data may shine some light on the characteristics of households that tend to carry credit card balances and what types of expenses may underlie their credit card debt.

In short, Traub finds that level of education, value of assets that households can fall back on, health insurance coverage, and whether a household member has lost a job are the best predictors of whether a household will accumulate credit card debt. Contrary to the theory that debtors are running up credit card balances by buying luxuries, the study finds little evidence that households with credit card debt have irresponsible spending habits. Rather, few assets that can be used or liquidated to pay expenses, lack of health insurance or insurance with hefty deductibles and coverage holes, and a gap in employment suggest that if my students were to dig into consumer debtors' credit card charge histories, they may be more likely to find expenses for everyday necessities and healthcare -- and very few 3D televisions and designer suits.


One problem with the study is that it lumps low and middle income households together. As anyone who lives in this income range knows, there's a big difference between $25K and $75K in income--about $50k, the median income in the US. Households with $25K in income may be eligible for government subsidies, but unless they don't have any housing, health care or child care costs, they aren't saving a sou. What I suspect is that households without debt, and with savings, are at the upper end of the distribution.

"In short, Traub finds that level of education, value of assets that households can fall back on, health insurance coverage, and whether a household member has lost a job are the best predictors of whether a household will accumulate credit card debt."

Of course. I agree with Peon as well. Must be careful lumping those two groups together, as they are vastly different.

Great article--insightful way to intertwine personal experience with nationwide concerns.

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