NEW YORK (MainStreet) — Struggling to overcome debt can be a debilitating burden. And as much as we may try to avoid it, a new study reveals that filing for bankruptcy may be a solution that eases the financial and physical stress more than ever suspected. We’re talking about a Chapter 13 bankruptcy here.
That’s the process where a partial repayment plan is worked out, rather than the asset liquidation required by a Chapter 7 filing.
Will Dobbie, an assistant professor of economics at Princeton, and Jae Song with the Social Security Administration, pored over a database linking 500,000 bankruptcy filings to Social Security records and home foreclosure proceedings. Their goal was to determine the impact of a Chapter 13 bankruptcy on earnings, the rate of foreclosures -- and even mortality.
In past studies, family households seeking bankruptcy protection have worked about the same number of hours, accumulated less wealth and, not surprisingly, have had less access to credit.
As might be expected, five-year home foreclosure rates fell by more than 19% -- a 100% improvement over those who were unable to gain the same debt relief. But the study from Dobbie and Song also uncovered some surprising results.
“In our empirical analysis, we find compelling evidence that Chapter 13 bankruptcy protection benefits debtors,” the researchers reported. “Over the first five post-filing years, Chapter 13 protection increases the marginal recipient’s annual earnings by $5,562, a 25.1% increase from the pre-filing mean. Employment increases by 6.8 percentage points over the same time period, an 8.3% increase from the baseline mean. And five-year home foreclosure rates decrease by 19.1 percentage points, a more than 100% decrease from the dismissed filer foreclosure rate.”
It’s not so much about the improvement of the financial condition of those that achieved bankruptcy protection as much as the reversal of fortune for those whose cases were dismissed without relief, the researchers said.
“Descriptive results suggest that the estimated impacts come from the deterioration of outcomes among dismissed filers, not gains by granted filers,” Dobbie and Song concluded. “Filers granted bankruptcy protection have similar pre- and post-filing earnings. In contrast, dismissed filers experience large and persistent drops in earnings after filing for bankruptcy.”
Perhaps most surprisingly, filers who were successfully granted Chapter 13 protection realized reduced mortality rates compared to those whose cases were dismissed. Five-year mortality rates were 30% lower. Plainly stated: filers who were successful in gaining debt relief lived longer. The study proposes that such a result can be attributed to the fact that many debt relief efforts are related to overwhelming medical expenses, combined with the stress and high mortality rates associated with displaced workers.
Though Chapter 7 bankruptcies are the most commonly filed -- accounting for nearly three quarters of all debt relief -- positive results were less dramatic, though certainly significant.
The research revealed that filers who were granted Chapter 7 bankruptcies earned $1,639 to $1,936 more than dismissed filers over the first five post-filing years and were 2.7% more likely to be employed over the same time period. Filers granted Chapter 7 also had five-year foreclosure rates that were 1.7 percentage points lower than dismissed filers. But Chapter 7 protection didn’t decrease mortality rates, according to the study.
--Written by Hal M. Bundrick for MainStreet