Comments on: Expenses, income, bankruptcy

By: Jon H

Jon H — Fri, 21 Sep 2007 00:13:23 +0000

“Look at the quarterly values and you can see the effect of the bankruptcy bill.”

Take some care with that – there was a rush to file before the bill took effect, which would distort things a bit if you simply compare the quarter when it took effect versus the prior quarter.

By: SamChevre

SamChevre — Wed, 19 Sep 2007 17:10:35 +0000

If you said, “medical emergencies cause many bankruptcies,” I would not disagree—but I strongly suspect the big effect is lost income, not medical bills.

By: delagar

delagar — Wed, 19 Sep 2007 17:00:14 +0000

Samchevre—as someone who recently went through a bankruptcy due to medical debt, I’ll mention that medical debt can cause debt in other areas—you’re paying off the hospital, the doctors, the pharmacists, well, that leaves no money to buy groceries, or pay rent, or save up for emergency car repair, and when the car breaks down, what do you do? You put it on the Visa, that’s what. It might look like you owe sixty thousand dollars for “other” debt; but that money would not have been on the Visa if you hadn’t owed the other money for the hospital bills.

By: wood turtle

wood turtle — Wed, 19 Sep 2007 02:29:52 +0000

A lot of medical treatments, especially for cancer, were not available in the 1970’s. So maybe the reason there were fewer bankruptcies then was that they were dead.

By: save_the_rustbelt

save_the_rustbelt — Tue, 18 Sep 2007 23:32:53 +0000

I’m not convinced either.

Out here in the real world medical crises, job losses and divorce (or some combination thereof) are the reasons for a large number of bankruptcies (some estimates of put medical bills at about 50%, probably not that high).

I regrettably became quite expert in bankruptcy accounting issues during the ‘81-’82 recession, and we are now in a longer cycle (six years) of high bankruptcy levels, albeit fewer businesses but more individuals. The cycle seems quite endless, as middle class jobs evaporate and medical insurance is harder to acquire.

Drop down to the courthouse and read the files, it will hook you up to reality.

By: Jay

Jay — Tue, 18 Sep 2007 21:56:52 +0000

You will recall from Keynes that, when a large segment of the population attempts to save at once, the result is a decrease in the velocity of money and a recession. Central banks, having the avoidance of recessions as a major goal, traditionally respond with interest rate cuts. The result is an economy in which savings are discouraged and debt encouraged, even if underlying income volatility is rising.

To my mind, theory matches observation rather well in this case.

By: mq

mq — Tue, 18 Sep 2007 21:05:20 +0000

Canada is a country with universal health care coverage….However, Canada experienced a very similar increase in bankruptcies (see Figure 1), which suggests that a factor common to both countries is primarily responsible.”

Slocum, if you look at the actual Figure 1 in their paper, it does not support this statement much at all. Not for the last thirty years, anyway.

By: SamChevre

SamChevre — Tue, 18 Sep 2007 20:17:42 +0000

Doug,

Also, the time period you reference includes both pre-change and post-change dates. Look at the quarterly values and you can see the effect of the bankruptcy bill.

By: SamChevre

SamChevre — Tue, 18 Sep 2007 20:16:04 +0000

Doug,

Read the study. It’s a totally bogus headline.

Most critically, they counted ANY bankruptcy with medical debt as a “bankruptcy due to medical expenses”, even if the medical debt was only a minor portion of the overall debt. Also, they counted addiction (gambling, alcohol abuse, drug use) as a medical problem.

By: Doug K

Doug K — Tue, 18 Sep 2007 20:12:02 +0000

a ‘decline in the cost of bankruptcy’ ?
That no longer applies, since the bankruptcy bill of 2005. Have bankruptcy filings declined since 2005 ? No, they have not:
“May 26, 2006 — The number of bankruptcy cases filed in federal courts rose 12.8 percent in the 12-month period ending March 31, 2006, according to statistics released today by the Administrative Office of the U.S. Courts. Bankruptcy cases totaled 1,794,795 for that period, compared to 1,590,975 bankruptcy cases filed in the 12-month period ending March 2005.”
http://www.uscourts.gov/Press_Releases/bankruptcyfilings052606.html

That undermines their diagnosis, rather.

They go on to say, “Based on experiment 4 in Table 3,we conclude that medical shocks can account for less than 20 percent of the rise in bankruptcies..’
Actual data, rather than experiment, shows that in 2001 more than half of bankruptcies were due to medical bills.
http://www.consumeraffairs.com/news04/2005/bankruptcy_study.html
This doesn’t give me much confidence in their experiments, either.

By: mpowell

mpowell — Tue, 18 Sep 2007 16:24:23 +0000

I guess I should read the paper, but if the primary reason for rejecting income volatility as a reason for part of the increase in bankruptcy filings is that people ought to save more money in uncertain times, then that’s kind of funny. I mean, isn’t that just starting with the assumption that you’re right? Do they actually measure the personal savings people accrue as a function of the income volatility that they face to test this hypothesis?

Otherwise I guess you could say that they’re arguing that the failure to save is the cause of the increase in bankruptcy. But then John Emerson would have it right: just blame the people for not being rational.

By: Slocum

Slocum — Tue, 18 Sep 2007 14:43:04 +0000

“In the 1970s corporations had some reluctance to fire their employees en masse to afford extravagent payoffs to their CEOs. This has changed.”

The 1970’s were also an era of both high unemployment and high inflation (remember Jimmy Carter’s and the ‘misery index’:

http://en.wikipedia.org/wiki/Misery_index_(economics)

The attempt to recast the 1970s as some kind of economic golden age is pretty comical to anyone old enough to remember them.

By: SamChevre

SamChevre — Tue, 18 Sep 2007 13:50:19 +0000

I tend toward the “it’s the credit market” explanation. From what I’ve heard, it was very difficult to get unsecured loans in 1970, unless you had substantial assets. (I wasn’t born yet, so corrections will be accepted graciously.)

The fundamental change to bankruptcy law was to make it more parallel to the credit market’s assumptions; expected future income is an asset.

By: Kieran Healy

Kieran Healy — Tue, 18 Sep 2007 13:30:47 +0000

No, it means “consistent with other things we know about consumer behavior.”

By: lemuel pitkin

lemuel pitkin — Tue, 18 Sep 2007 13:08:57 +0000

The whole credit card business is centred on the fact that lots of people (about half the population) don’t pay their monthly balances down to zero and therefore carry semi-permanent debt at very high interest rates. It’s hard to imagine that people who have trouble managing their credit cards are computing, in advance, the income risk they face and making precautionary savings to offset this.

Does “hard to imagine” here really mean “logically impossible”?