Long-Term Income Stagnation Among the Bankrupt

Abstract

There is ongoing interest in determining what predicts that a person will file bankruptcy. Past research has pointed to both a variety of acute shocks immediately before filing and the presence of substantial debt as risk factors for filing bankruptcy. We provide evidence on both fronts by using the PSID sample of bankruptcy filers to look at income, consumption, and asset decisions in the decade before filing. We show that the acute income shocks faced by the bankrupt are only slightly worse than those of a demographically comparable set of non-bankrupt. On the other hand, while most households have rising income and consumption over the life cycle, the bankrupt start at a point similar to their peers but have stagnant income in the decade before filing. Over the same period their consumption continues to match that of their peers. The high levels of debt observed at the time of filing are thus likely the result of below average income growth coupled with average consumption growth.