The relationship between the overall economy and bankruptcy filings is not as simple and straightforward as it might seem.
To be sure, the Great Recession and its uncertain aftermath have resulted in lost jobs and depleted asset portfolios that have led many people to file for personal bankruptcy. But it may be that sometimes the biggest spikes in bankruptcy filings occur when the national economy is doing well rather than struggling.
In fact, that is exactly what happened in the mid-90s, before the Dotcom bubble burst. Economic times were generally good for many people back then. But the number of bankruptcy filings was also high. In this post, we will explore why there is no precise alignment between the national economy and consumer bankruptcy.
Melissa Jacoby, a law professor at the University of North Carolina, suggests bankruptcies may increase during boom times because people tend to take more risks when economic times are good. This would tend to explain why bankruptcy filings were so high during the Clinton years.
Of course, the high number of bankruptcy filings during those years led to heavy lobbying by the credit card industry for an overhaul of the consumer bankruptcy system. Concerns about the system culminated in changes in bankruptcy law 2005, such as requiring a means test for certain types of bankruptcy filings.
For a few years, these changes brought down the number of bankruptcy filings. But then the recession hit in 2007 and bankruptcy filings went up again.
More recently, the total number of filings has trended back down. As we have discussed, however, the connection between this and the overall economy is not always a direct one.
Source: Marketplace, “Bankruptcy filings are plummeting,” Annie Baxeter, Nov. 5, 2013