The Restructuring Report

Three scholars published a new analysis of Chapter 7 and Chapter 11 consumer bankruptcy filings that is likely both the broadest and the most targeted study of consumer bankruptcy filing since Teresa A. Sullivan, Elizabeth Warren and Jay Lawrence Westbrook published The Fragile Middle Class: Americans in Debt. The new study by Professors Pamela Foohey, Robert M. Lawless and Deborah Thorne is titled Portraits of Bankruptcy Filers and was published on August 18, 2022, in the Georgia Law Review.

Their undertaking was primarily to identify “some fundamental groupings of filers that provide important lessons for the consumer bankruptcy laws and system.” Their conclusions are drawn from bankruptcy case data compiled by the Consumer Bankruptcy Project (CBP), which is an ongoing long term research project studying persons who file bankruptcy. The authors of the new study are the current team of co-investigators for the CBP.

The data used consists of 474 variables in 5,600 randomly selected consumer bankruptcy cases from 2013 through 2019 using something called “principle component analysis” supplemented by responses to questionnaires sent to those filers. The distinctive findings suggest nine groupings of financial and household situations among bankruptcy filers. Their summary:

Our analyses distill to five principal findings. First, the two most distinct groups of financial situations involve homes and cars, and most people have little equity in these homes and cars when they file. Second, people file to deal with a handful of other key debts: debt secured by other real property, small business debts and priority and unsecured debts, particularly tax debt. Third, people file after threatened or actual legal actions: following state court lawsuits, including the financial fallout from their divorces, and after struggling to pay their debts for years, which we have previously linked with debt collection. Notable among these issues is divorce. Divorce links with our other two principal findings, which center on demographics. Fourth, bankruptcy remains a women’s issue. Younger parents, including single women, constitute a distinct grouping of debtors. Fifth (and finally), black households file bankruptcy at more than twice the rate that they appear in the general population. Black single women, in particular, constitute a grouping of filers. These two findings of racial disparity highlight bankruptcy’s intersection with larger economic and social issues.

The study revealed nine components as representing distinct types of bankruptcy filers:

1. car owners
2. homeowners
3. long strugglers
4. young with children
5. owners of other real property
6. black and/or women
7. self-employed
8. unsecured debtors
9. judgment lienees.

The study describes these categories in some detail and the relationship between these factors and the situation of bankruptcy filers. There is not space in this short article to elaborate on these categories.

An understanding of the patterns of the bankruptcy filings obviously could aid in the development of bankruptcy policy which would be based on actual data rather than mythologies as has sometimes driven bankruptcy legislation. The authors briefly discuss the Consumer Bankruptcy Reform Act of 2022 which has been introduced by Senators Warren, Durbin and Whitehouse and Representatives Nadler and Cicilline.

Among other things, the authors advocate for a single consumer bankruptcy access point with, multiple variations thereafter, variations best suited to the specific problems to be addressed. This would contrast with the current two rigid alternatives – Chapter 7 and Chapter 11. Bankruptcy could be better tailored to the needs of the people who file.

The study focuses on bankruptcy law and policy. But practitioners, by using the data and analysis, could organize their forms and their approaches to best address the problems and tailor their approaches to the particular debtors who seek help from them to be more efficient and effective in helping them. The study also tells us that eight percent filed without an attorney and five percent utilized a petition preparer. Pro bono and legal aid organizations are willing to assist these debtors. Some organizations like those could similarly use the information in the article to prepare to assist these debtors effectively and efficiently.

The article is extensively footnoted identifying other studies and articles addressing consumer debtor issues. Readers who want to further address particular issues will find a research roadmap in this excellent law review article.