NCPA - National Center for Policy Analysis

When There Is No Stigma To Bankruptcies

February 27, 2001

How does one reconcile the fact that bankruptcies have skyrocketed at a time of extraordinary prosperity? Some blame lenders for issuing too many credit cards. But economists David B. Gross of Lexecon Inc. and Nicholas S. Souleles of the Wharton School say it is because there is less "social stigma" attached to reneging on debts and leaving creditors holding the bag. In a paper delivered to the American Economic Association's annual meeting in January 2001, they say:

  • The number of personal bankruptcies doubled in the 1990s -- with the 1995-97 era being the fastest-growing default period of the decade.
  • Using a sample of about 300,000 credit-card accounts, they found that in the mid-1990s it became easier to get information about bankruptcy -- with lawyers suddenly beginning to aggressively offer their services.
  • Their research suggests that bankruptcy numbers will continue to swell -- absent legislation to discourage it -- even if the economy continues to grow.
  • In fact, Visa International has reported that bankruptcies for the first four weeks of 2001 were up 30 percent over the period a year ago.

Souleles concludes that perhaps "the scarlet letter associated with bankruptcy is disappearing."

Source: Charles J. Whalen, "Economic Trends: Bankruptcy? So What?" Business Week, February 19, 2001.

For Business Week text


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