Driven to Bankruptcy — New Research from the Consumer Bankruptcy Project

In America, people drive — to work, to the doctor, to the grocery store, to their kids' daycare, to see their aging parents. Research shows that car ownership increases the probability of employment and number of hours worked; households without cars have lower incomes and are more likely to be in poverty. In short, cars are essential. Household financial distress can threaten people's cars, and with them, the day-to-day stability that car ownership brings. People thus may file bankruptcy, in part, to save their cars.

Although there is a substantial literature on financial distress and home ownership, the literature on car ownership, financial distress, and bankruptcy is thin. In Driven to Bankruptcy (available via SSRN, forthcoming in the Wake Forest Law Review), Slipster Bob Lawless, past Slipster Debb Thorne, and I document what happens to car owners and their car loans when they enter bankruptcy.

In brief, we find that people who file bankruptcy own automobiles at the same rate as the general population. This means that over the last ten years, 15.1 million people filed for bankruptcy owning 16.4 million cars. The majority of these cars, particularly a household's most valuable car, entered bankruptcy encumbered with a hefty loan. And most debtors want to keep their cars, particularly their most valuable and second most valuable cars.

People who file chapter 7 with cars overwhelmingly indicate that they intend to use the bankruptcy process to reaffirm their car loans or to keep their cars through some other means of retention (that is, ride through). Debtors' stated intentions are important in light of BAPCPA's changes to the Bankruptcy Code's reaffirmation provisions. As a point of comparison, we look to a study by Marianne Culhane and Michaela White of chapter 7 cases filed in seven districts in 1995. They found that a similar percentage of debtors entered bankruptcy with cars (as compared to our data) and that 72% of debtors who listed cars on their Statement of Intentions form indicated that they intended to reaffirm. In our dataset of chapter 7 debtors who filed between 2013 and 2018 in those seven districts, 62% indicated that they intended to reaffirm. It appears that reaffirmation rates have declined since 1995, although we do not observe whether the reaffirmations occur. In the article, we posit that BAPCPA's changes likely chilled reaffirmation agreements, probably in favor of ride-through.

We further identify a subset of debtors, who constitute about a third of filers, who come to bankruptcy owning automobiles and little else. These cases are the most likely to be filed by people “driven to bankruptcy.” Of note, a subset of these filers (about 18% of all debtors with cars) generally enter bankruptcy with negative equity in their cars. These households essentially are paying to file bankruptcy so that they can continue to pay more for their cars than those cars are worth. These households also enter bankruptcy with higher value cars than other debtors and are more likely to be African-American.

We end the article with thoughts about what our results show about how people use consumer bankruptcy and where the system appears to falter. This discussion includes some thoughts about how our results may link to racial disparities in car prices, auto loan rates, ticketing, booting for unpaid parking tickets, license suspensions, and repossessions. We conclude with recommendations on how to improve the consumer bankruptcy system in light of our findings, as well as what the future of the automobile marketplace, particularly subprime auto loans, likely means for people’s continued use of bankruptcy. Download the article for these (and more) details.