NCPA - National Center for Policy Analysis

Bankruptcies Climb in Prosperous Years

February 11, 2000

One would think personal bankruptcies would be more numerous during economic recessions and more scarce in good times. But over the past few decades that hasn't been true.

  • Between 1968 and 1982, the amount of credit card debt in the U.S. multiplied by almost 50 times.
  • The years between 1978 and 1982 were economically volatile -- with two recessions, gyrating inflation and interest rates scraping 20 percent twice in the period.
  • Yet the great takeoff in the number of consumer bankruptcies began in 1985 -- a year of economic smooth sailing.
  • Bankruptcy filings declined in 1992 and 1993, relatively weak years, and then rocketed upward after 1994.

Although the filing rate declined somewhat early in 1999, in each year of the booming 1990s more than a million Americans have declared bankruptcy -- hitting an all-time peak in 1998.

Some economists look to the 1978 passage of the bankruptcy code to explain the anomaly of bankruptcy amid prosperity. The law made it easier for consumers to escape their debts and growing numbers did just that -- as the social stigma of bankruptcy declined.

Last week the Senate passed amendments to the 1978 law that would make it somewhat more difficult for middle-income consumers to escape all their debts by entering Chapter 7. The House did something similar last year.

Political observers say that early indications are that President Clinton will resist tightening the bankruptcy code, although the House and Senate versions of the bill passed with veto-proof margins. New York Senate candidate Hillary Clinton has also voiced her opposition to the legislation.

Source: David Frum (Manhattan Institute), "Bankruptcy Reform Is a Moral Issue," Wall Street Journal, February 11, 2000.

 

Browse more articles on Economic Issues