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Bankruptcy Recovery Time Longer than Many Expect

It can take 10 to 20 years or more to fully recover, researchers find

June 27, 2008

"Bankruptcy is not a lifelong curse, but it doesn't provide an immediate fresh start either," said Jay Zagorsky, co-author of the study and a research scientist at OSU's Center for Human Resource Research.

Compared to those who have similar social and economic backgrounds, people who declare bankruptcy catch up to non-filers in terms of savings in about 12 years, total income in 14 years, home ownership in 14 years, and net worth in 26 years.

However, on some measures, those who go through bankruptcy do as well as or slightly better than those who never filed, the researchers found.

For example, 90 percent of those who went bankrupt have a car less than a year after bankruptcy, compared to 89 percent of those who never filed. About 74 percent of bankruptcy filers have full time jobs after one to five years, compared to 73 percent of non-filers.

"Along some dimensions, such as access to a car, bankruptcy doesn't seem to have any negative effect at all," Zagorsky said. "But on most measures, bankruptcy does set people back quite a bit."

Zagorsky conducted the study with Lois R. Lupica, the Maine Law Foundation Professor of Law at the University of Maine. Their research will appear in a forthcoming issue of the ABI Law Review, published by the American Bankruptcy Institute.

The results of the study are important because it is one of the few studies that has looked at how Americans fare after bankruptcy, Zagorsky said. The main reason for the lack of studies has been a lack of good data.

However, for this study, the researchers had good data from the National Longitudinal Survey of Youth, which has questioned the same group of randomly selected Americans 22 times since 1979. The NLSY is conducted by Ohio State's Center for Human Resource Research.

This study focused on data from the 2004 survey, when respondents were asked about possible bankruptcy filings. The survey included 7,661 respondents who were in their mid-40s in 2004, of which 13.5 percent said they had declared bankruptcy.

What's measured

What happens after bankruptcy depends on what is being measured.

While those undergoing bankruptcy do better than others in car ownership, they are saddled with more car debt. The percentage of respondents with car debt declines over time from 52 percent just after bankruptcy to 46 percent among those who filed more than 15 years ago. But it never reaches the 42 percent level of those who never filed.

Home ownership increases steadily from 50 percent of those who recently filed to 68 percent of those who filed more than 15 years ago. But no matter how long ago the bankruptcy occurred, the homeownership rate never reaches the 73 percent level of those who have never filed.

The percentage of bankruptcy filers with savings increases from 60 percent immediately after bankruptcy to 74 percent among those who filed more than 15 years ago. About 81 percent of people who have never filed have savings.

Those who go bankrupt also eventually regain use of credit cards. Just 18 percent of recent filers had a credit card, but that increases to 68 percent after 15 years, nearly the same percentage as those who never filed.

The study also compared consumers who filed for bankruptcy under Chapter 7 (in which much of the filer's assets are sold to pay off creditors) with those who filed under Chapter 13 (in which the filer pays off all or some of his debts over time).

In general, results showed that those who filed under Chapter 7 took longer to catch up with their non-filing peers than did those who went the Chapter 13 route, Zagorsky said.

Predates new law

Zagorsky noted that the data from this study came before a new federal bankruptcy law was enacted in October 2005 which made it more difficult for consumers to file for bankruptcy protection.

"This means that the numbers discussed in this research might underestimate the length of time the average person needs to catch up under the new law," Zagorsky said.

Data on people who filed under the new law will eventually become available, he said. Earlier this year, the NLSY began the 23rd round of interviewing respondents. That data will be available in 2010.

But this study offers a glimpse at what life may be like for financially troubled people today who may be considering bankruptcy.

"The bankruptcy discharge offers debtors immediate relief from current debts, but to experience what people may heard of as a 'fresh start,' that may take longer than they expect or would like."

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