A Fighting Chance (47 page)

great defeat and, often, personal shame:
Despite claims that bankruptcy has “lost its stigma,” the evidence suggests that there is still a lot of personal shame surrounding bankruptcy. For example, one long-term study found that 50 percent of bankrupt families were unwilling to admit, even anonymously, that they had filed for bankruptcy. Scott Fay, Erik Hurst, and Michelle J. White, “The Household Bankruptcy Decision,”
American Economic Review
92 (June 2002): 706–18. Other studies have shown that a large portion of households that do not file for bankruptcy would significantly benefit from filing for bankruptcy, which suggests that stigma prevents at least some people from acting in their best financial interests. See Michelle J. White, “Why It Pays to File for Bankruptcy: A Critical Look at the Incentives Under U.S. Personal Bankruptcy Law and a Proposal for Change,”
University of Chicago Law Review
65 (Summer 1998): 685–732. People on the ground, such as those who advise clients with respect to bankruptcy, further reaffirm the sense of anguish and personal shame people feel when filing for bankruptcy. See Elizabeth Warren and Amelia Warren Tyagi,
The Two-Income Trap
(2003), 74 & n.12; see also Daniel Bortz, “Surviving the Emotional Toll of Bankruptcy,”
US News and World Report
, January 18, 2013 (illustrating the perspective of financial therapists, who see bankruptcy as taking a huge toll on a person’s self-esteem and emotional well-being). In the course of researching for
The Two-Income Trap
, our research team found that more than 80 percent of families said they would be “embarrassed” or “very embarrassed” if their families, friends, or neighbors knew of their bankruptcy. See
The Two-Income Trap
, 74 & n.13.

housemaids who lived at the economic margins and always would:
Many scholars once assumed that all debtors were “a poverty-stricken, chronically unemployed segment of the lower class”—people on the economic margins. Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook,
As We Forgive Our Debtors
(1989), 63; see also Philip Shuchman, “Social Science Research on Bankruptcy,”
Rutgers Law Review
43 (1990): 185.

the kind of study that legal experts almost never did:
We were not the first researchers to try to understand more about the actual individuals who file for bankruptcy. For example, David Stanley and Marjorie Girth of the Brookings Institution conducted a notable study in 1971 that provided crucial insight into the sources of financial stress for those going into bankruptcy, the demographics of debtors, and debtors’ postbankruptcy experiences. See David T. Stanley and Marjorie Girth,
Bankruptcy: Problem, Process, Reform
(1971).

building a giant mosaic, one tile at a time:
The 1981 study relied on bankruptcy petition data. The petition data included information regarding debts and assets, income, and the petitioner’s business, but it contained very little demographic information. The study covered districts in Illinois, Pennsylvania, and Texas. We coded financial information and supplemented our data with interviews with bankruptcy judges and bankruptcy lawyers.

The 1991 study relied on one-page questionnaires in addition to financial data from court records, which were vetted by the University of Texas and the University of Pennsylvania for the protection of human subjects. These questionnaires were designed to provide demographic and employment information about debtors. We asked trustees to distribute these questionnaires to debtors in Section 341 meetings, which are mandatory for debtors, in the first half of 1991. Debtors were told that participation in the study was voluntary and anonymous. We received about 59,000 questionnaires, which we winnowed down—through random selection—to a final sample of 150 cases from each district. In addition to drawing from the districts in the 1981 study, we drew from select districts in California and Tennessee. After coding the questionnaires according to a set of common criteria, we analyzed the data with an eye toward statistical significance while accounting for the possibility of selection bias and other types of data distortions. We supplemented this data with other publicly available data, such as the 1990 Census, as well as data generated by bankruptcy judges and economists.

As in the 1991 study, the 1999 study relied on core financial data and questionnaires that were distributed during mandatory debtor meetings. The study had an expanded geographical scope, covering districts in California, Illinois, Kentucky, Ohio, Pennsylvania, Tennessee, Texas, and Wisconsin. Our final sample for the 1999 study amounted to 1,496 cases. Again, we took steps to account for the possibility of selection bias and other types of data distortions.

In all three studies, we adhered to strict confidentiality protocol to protect the identities of participants.

For more information on the methodology underlying these studies, see the Appendices to
As We Forgive Our Debtors
(1981 study) and Jay Lawrence Westbrook, Elizabeth Warren, and Teresa A. Sullivan,
The Fragile Middle Class
(2000) (1991 study) as well as the 1999 supplementary study documented in Melissa B. Jacoby, Teresa A. Sullivan, and Elizabeth Warren, “Rethinking the Debates over Health Care Financing: Evidence from the Bankruptcy Courts,”
NYU Law Review
76 (2001): 375.

found good jobs, gotten married, and bought homes:
In our 1991 study, we found that bankruptcy filers were generally better educated than the average adult population in key respects. Primary bankruptcy filers were slightly more likely than the average person to have had formal education beyond high school and to have completed one to three years of college. Given that education is one of the cornerstones of middle-class identity, this evidence suggests that bankruptcy filers were not on the socioeconomic fringe of society. Similarly, the average primary bankruptcy filer was currently or previously employed in a job rated as prestigious as the average job in society. Finally, we found that debtors’ median age was roughly similar to the population generally. These indicators, as well as the racial/ethnic and gender indicators we looked at, suggest that far from residing on the economic margins of society, bankruptcy filers were generally part of the middle class. See
The Fragile Middle Class
, 27–74. Also see Elizabeth Warren, “Financial Collapse and Class Status: Who Goes Bankrupt?” (Lewtas Lecture),
Osgoode Hall Law Journal
41 (2003): 115, examining data on education, homeownership, and job status for debtors filing for bankruptcy in 1981, 1991, and 2001.

or a family breakup (typically divorce, sometimes the death of a husband or wife):
The 2001 Bankruptcy Project revealed that nearly nine in ten families cite three primary reasons for their bankruptcies: job loss, medical problems, and family breakup, which was consistent with previous empirical studies. See
The Two-Income Trap
, 81 & n.31. In the 1991 study, more than two-thirds of debtors cited job-related financial stress, including job loss and job interruption, as reason for their bankruptcies. See
The Fragile Middle Class
, Chapter 3. Almost 20 percent of debtors cited medical reasons for their bankruptcies. See
The Fragile Middle Class
, Chapter 5. And more than 15 percent of debtors cited marital disruption as an important contributor to their bankruptcies. See
The Fragile Middle Class
, Chapter 6. The 1981 study also concluded that “job loss, divorce, illness and injury [were] implicated in many bankruptcies.”
As We Forgive Our Debtors
, preface.

full year’s income in credit card debt alone:
According to the 1991 study, the mean credit card debt of bankrupt debtors was $11,529, as compared to $3,635 in 1981 (both figures stated in 1997 dollars). To put it even more starkly, in 1991 the average bankrupt debtor had credit card debt that amounted to about six months’ worth of income, as compared to six weeks’ worth of income for the average bankrupt debtor in 1981. See
The Fragile Middle Class
, Chapter 4. When it comes to homeownership, the 1991 study revealed that about half of the individuals who declared bankruptcy were homeowners, with the total climbing to above two-thirds in some districts. Although the number of homeowners in the bankruptcy sample was underrepresentative of the general population, these findings are quite significant given the relationship among homeownership, assets, and financial security. See
The Fragile Middle Class
, Chapter 7.

the number of bankruptcies unexpectedly doubled:
In 1980 there were approximately 290,000 consumer bankruptcy filings in the United States. By 1987, there were more than 500,000 filings, and by 1990 there were more than 700,000 filings. To see the number of consumer bankruptcies between 1980 and 2010, see “Influence of Total Consumer Debt on Bankruptcy Filings, Trends by Year 1980–2010,”
http://www.abiworld.org/statcharts/Consumer%20Debt-Bankruptcy2011FINAL.pdf
.

five part-time jobs to meet rent, utilities, phone, food, and insurance:
The data used in this book were gathered under strict confidentiality requirements typical of human-subjects research protections at American universities. All data analysis was done using anonymous numerical identifiers for the study participants. When referencing individuals, names and specific identifiers have been changed to preserve anonymity. See
The Two-Income Trap
, 184;
The Fragile Middle Class
, Appendix 1;
As We Forgive Our Debtors
, preface, 5, 49. Note that the quotes in the text are from:
The Fragile Middle Class
, “Sickness,” “Unemployed or Underemployed.”

so that they could restructure and keep going:
Businesses may file for Chapter 7 or Chapter 11 bankruptcy. For discussion of the Chapter 7 process, see note,
“
a chance to start over…
”
In Chapter 11 bankruptcy, the business may continue to operate, but the debtor must work with his or her creditors to negotiate a bankruptcy plan, which must be approved by a bankruptcy court. If the plan meets certain requirements, such as fairness and priority of creditors, the creditors may vote on the plan. Once the plan is approved, the debtor will continue to operate and abide by the terms of the plan. To the extent that creditors cannot agree to a plan, the court may intervene in order to expedite the process. In a large Chapter 11 case, the shareholders are typically wiped out and the new financiers, perhaps in conjunction with the old creditors, become owners. In the case of a sole proprietorship, the residual ownership of the business may be hotly contested, as the owner struggles to hang on and a single big creditor, typically the bank, attempts to seize all the assets and shut the business down. The burden of bankruptcy generally falls disproportionately on small businesses, because costs are high and many cannot survive the reorganization process without some flexibility with respect to payment schedules. See Elizabeth Warren and Jay Lawrence Westbrook, “The Success of Chapter 11: A Challenge to the Critics,”
Michigan Law Review
107 (2009): 603, 638–40; Alan N. Resnick, “The Future of the Doctrine of Necessity and Critical Vendor Payments in Chapter 11 Cases,”
Boston College Law Review
47 (2005): 183, 198–203. In addition, recent developments with regard to unsecured creditors have prompted small businesses to pursue liquidation over reorganization. See Ian Mount, “Advisor to Businesses Laments Changes to Bankruptcy Law,”
New York Times
, February 29, 2012. I have elsewhere argued that we should be, and that Congress in fact was, especially concerned about the effect of bankruptcy law on small and struggling businesses. See Elizabeth Warren and Jay Lawrence Westbrook, “Financial Characteristics of Businesses in Bankruptcy,”
American Bankruptcy Law Journal
. 73 (1999): 499, 553; Elizabeth Warren, “The Untenable Case for Repeal of Chapter 11,”
Yale Law Journal
102 (1992): 437, 468.

the number had more than doubled in the decade since I had started teaching:
The number of non-business filings in 1980 was 287,570 as compared to 718,107 in 1990, which corresponds to a 150 percent increase in filings. See Annual Business and Non-business Filings by Year (1980–2012), Table from
http://www.abiworld.org/AM/Template.cfm?Section=Non-business_Bankruptcy_Filings1&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=60&ContentID=36302
.

big banks stepped up their efforts to change the bankruptcy laws:
The credit industry, claiming that bankruptcy law protected debtors too much, successfully lobbied for changes to the Bankruptcy Code in 1984. The 1984 amendments were based in part on an empirical study funded by the credit industry. However, the study was founded on empirically unsound research designed to support the industry’s goals to shrink bankruptcy protection for families in trouble. See Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, “Rejoinder: Limiting Access to Bankruptcy Discharge,”
Wisconsin Law Review
(1984): 1087, 1087–90. In addition to supporting this expensive and dubious study, the credit industry fought for amending legislation in Congress and claimed in a number of newspaper articles that debtors were discharging “as much as $1.1 billion in bankruptcy that ‘they could repay.’” See Elizabeth Warren, “Reducing Bankruptcy Protection for Consumers: A Response,”
Georgia Law Journal
72 (1984): 1333–34 & nn. 3–9. After achieving some success with the 1984 amendments, the credit industry continued to lobby Congress for additional changes it desired throughout the 1990s. See Elizabeth Warren, “The Market for Data: The Changing Role of Social Sciences in Shaping Law,”
Wisconsin Law Review
(2002): 1, 8 & nn. 19–22; David G. Hicks, “The October Surprise: The Bankruptcy Reform Act of 1994—An Analysis of Title II—The Commercial Issues,”
Creighton Law Review
29 (1996): 499, 501–02 & nn. 8–12 (discussing the role of the American Bankers Association in successfully quashing any “anti-industry” changes to the law).