People’s Pre-Bankruptcy Struggles -- New Paper from the Consumer Ban...

The current Consumer Bankruptcy Project (CBP)’s co-investigators (myself, Slipster Bob Lawless, and past Slipsters Katie Porter & Debb Thorne) just posted to SSRN our new article (forthcoming in Notre Dame Law Review), Life in the Sweatbox. “Sweatbox” refers to the financial sweatbox—the time before people file bankruptcy, which is when they often are on the brink of defaulting on their debts and lenders can charge high interest and fees. In the article, we focus on debtors’ descriptions of their time in the sweatbox.

Based on CBP data, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. Two-thirds of people who file bankruptcy reported struggling with their debts for two or more years before filing. One-third of people reported struggling for more than five years, double the frequency from the CBP’s survey of people who filed bankruptcy in 2007. For those people who struggle for more than two years before filing—the “long strugglers”—we find that their time in the sweatbox is marked by persistent debt collection calls, the loss of homes and other property, and going without healthcare, food, and utilities. And although long strugglers do not file bankruptcy until long after the benefits outweigh the costs, they still report being ashamed of needing to file.

Beyond finding that people are spending longer in the sweatbox prior to filing and describing the financial and emotional drain of long strugglers’ time in the sweatbox, our results challenge enduring narratives about who files bankruptcy and why. Prevailing narratives about people filing “bankruptcies of convenience” have profound legal effects. They influence the legislative details of the Bankruptcy Code, how bankruptcy judges rule in individual cases, how attorneys interact with their clients, and even consumer credit laws function more generally. Our results suggest that the bankruptcy system, at present, cannot deliver its promised “fresh start” to many of the families that seek its protection.