A Study of Consumers' Post-Discharge Finances: Struggle, Stasis, or Fresh-Start?

Abstract

The postwar U.S. has experienced an extremely sharp rise in consumer bankruptcies. What happens to these consumers financially after filing for bankruptcy? Do filers catch up with their non-filing peers, stay at a constant distance or fall further behind over time? This question is investigated empirically using a new set of financial and bankruptcy data obtained from a large national random survey of bankruptcy filers and non-filers. Along some simple financial dimensions, such as car ownership, bankruptcy filers are not disadvantaged compared to non-filers. Along more complex indicators, such as total income and net worth, filers catch up over time but it takes between a dozen and two dozen years. The theoretical justification for allowing consumers to file bankruptcy is to afford debtors a fresh start, in essence, a restoration of financial well-being. Results suggest the U.S. bankruptcy system does not immediately provide consumers with a fresh start; the average filer takes many years to restore their financial well-being.