A NEW PERSPECTIVE ON RISING NONBUSINESS BANKRUPTCY FILING RATES:

ANALYZING THE REGIONAL FACTORS
 

Nonbusiness bankruptcy filings in the U.S. have increased almost five-fold since 1980. Although Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to eliminate alleged abuses of the bankruptcy system and reduce filing rates, much is still not understood about bankruptcy behavior.

            Kelly Edmiston, a senior economist at the Federal Reserve Bank of Kansas City explores the issue in “A New Perspective on Rising Nonbusiness Bankruptcy Filing Rates: Analyzing the Regional Factors.” The article is featured in the second quarter edition of the Bank’s Economic Review.

            Edmiston improves on approaches used in other studies by including a number of determinants not previously considered. Edmiston notes that filing rates vary considerably by county and he explores regional factors which may be critical in understanding rising filing rates.

            He finds that homestead exemption laws, which limit the amount of home equity that must be used to pay unsecured debt under bankruptcy, and wage garnishment laws can be effective policy levers in managing rising bankruptcy filing rates. Both should be evaluated, Edmiston writes, to ensure that consumers are offered some protection and a fresh start without being given too much incentive to engage in risky financial behavior that may lead to bankruptcy.

            Edmiston also finds that social issues – stigma, gambling and health insurance, among others – are critical regional factors that help explain the rising bankruptcy filing rates. The article also shows that higher levels of self-employment are associated with lower bankruptcy filing rates.

The article and full conference proceedings are available on the Bank’s Web site at www.KansasCityFed.org.

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