February 9, 2009

What causes personal bankruptcy?

Megan McArdle on a recent study that finds job loss and medical condition NOT the major cause of personal bankruptcy.

Rather, it's over-consumption, spending on houses and cars,  that people can't afford that drives people to file for bankruptcy.

This paper utilizes the population of personal bankruptcy filings in the state of Delaware during 2003 and finds that household expenditures on durable consumptions, such as houses and automobiles, contribute significantly to personal bankruptcy. Adverse medical conditions also lead to personal bankruptcy filings, but other adverse events such as divorce and unemployment have marginal effects. Over-consumption makes households financially over-stretched and more susceptible to adverse events, which reconcile the strategic filing and adverse event explanations.

Posted by Jill Fallon at February 9, 2009 9:05 AM | Permalink