The Class of 2008: The Great Recession and the American Debtor Contributing Editor: Leslie E. Linfield Institute for Financial Literacy Portland, Maine firstname.lastname@example.org
ecember 2009 marks the two-year anniversary of when the United States entered into the deepest economic recession since the Great Depression. Unemployment has surpassed the 10 percent mark. Bankruptcy filings are breaking new records month after month since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted. In fact, October 2009 was the highest filing month post-BAPCPA with 135,913 consumer filings, followed by July 2009 with 126,434 consumer filings. Yet we are also hearing that there are signs of recovery and the economy is turning around. Berkshire Hathaway CEO Warren Buffett said in an interview in September that Leslie E. Linfield the economy appears to have leveled off. Federal Reserve Chairman Ben Bernanke affirmed, stating that “from a technical perspective, the recession is very likely over at this point.” So what does this mean from the perspective of the American debtor? For several years, I have written this “Class of” article for the ABI Journal. It is based on an annual paper published by the Institute for Financial Literacy (IFL) on consumer bankruptcy demographics. This year’s paper is interesting because it may be the only year that actually captures debtors who filed during the Great Recession, as the data collection in this report began Jan. 1, 2008. If the National Bureau of Economic Research, which officially decides when the economy enters and exits a recession, declares that the U.S. exited the recession in 2009, then next year’s class will potentially be impacted. As we reviewed this year’s data, we asked, “How was the Class of 2008 different from the Class of 2007?” There were some noticeable differences in this year’s data. The next question was, “Did 14 December/January 2010
About the Author Leslie Linfield is the executive director of the Institute for Financial Literacy (IFL), a national financial literacy education organization and an approved credit counseling provider with the U.S. Trustee Program and Bankruptcy Administrators. the Great Recession have any impact?” In all fairness, I have to answer, “We don’t know, but we suspect so.” There were some changes in the rate of responses in the “Causes of their Financial Distress” category, but nothing we can definitely point to and say “a-Ha!” My academic colleagues are invited to do deeper research into this question, and our door is open to your research. For those who want to skip the foundational stuff, you can skip to the subhead “Class of 2008.” The IFL knew back in early 2005 that it would seek approval to provide the pre-filing budget, credit
bankruptcy petition to rely on, and that which is not asked for is not given. The schedules currently do not request or require a debtor to disclose age (it can be voluntarily provided on Schedule I), ethnicity, educational attainment or marital status. (The “marital status” block only asks if you are married or unmarried on Form 22A. One can presume from a joint petition that a couple is a man and a woman, as same-sex couples are not allowed to file a joint bankruptcy petition at this time). Current employment status also cannot be determined, nor can the underlying causes for the consumers’ financial distress. With these parameters, we set out to design the survey tool. The IFL provides counseling and education services in-person, 4 by telephone and online, and a survey gathers demographic information from the client at the beginning. If a client receives both services, the survey information is only gathered once. Clients taking a counseling or education
Consumer Corner counseling1 and predischarge financial management instructional courses2 in all 94 judicial districts.3 This presented a unique opportunity for the collection of large amounts of data on both prospective debtors (credit counseling clients) and actual debtors (education clients). As we designed the programs and delivery methodology, we integrated data-collection instruments that would dovetail into our delivery of service. The challenges of this project were great, as we had less than six months to build a brand-new program from scratch. We needed to determine what questions to ask, and for that we went to the existing body of research. For longtime Journal readers, you may know that the existing research on consumer demographics has been limited. The primary reason is that most researchers have only had the 1 11 U.S.C. §111(a). 2 11 U.S.C. §§727(a)(11) and 1328(g)(1). 3 Of these, 88 districts are covered by the U.S. Trustee Program. North Carolina, Alabama and their six respective judicial districts are under the authority of the individual Bankruptcy Administrators (BA).
program via the Internet for the first time are presented with the “Client Survey” page before proceeding. Here, they read the following statement: Before we begin your session, we would like to collect some information from you. This information will not be used to personally identify you in any way. The information will be used for statistical research purposes as we evaluate our program. Should clients choose not to complete the survey, they simply move to the next page and begin their program. Clients receiving services by telephone or in-person are informed by counselors that the IFL is conducting ongoing research, and that clients are not required to answer the questions. Counselors also explain that the information gathered will have no impact on the outcome of the counseling or education session. 4 In the District of Maine.
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Consumer Corner: The Great Recession and the American Debtor from page 14
Once a client agrees to participate, they are given a confidentiality statement by the counselor. The categories surveyed include gender, age, ethnicity, educational background, personal income, employment, marital status and causes of financial distress. The data that has been collected in the past three years has begun to pay dividends for the academic and research community. In a paper published last year by the Consumer Bankruptcy Project for the AARP, some of their data findings were supported regarding age and bankruptcy by comparing them to the IFL’s age demographics.5
Class of 2008
Just how many alumni were there in 2008? Exactly 45,229 clients volunteered to complete the survey in whole or in part. This was an increase of 23 percent over last year’s survey of 36,907 clients. To put that number into perspective, the number of new nonbusiness bankruptcy cases filed nationally between Jan. 1 and Dec. 31, 2008, was more than 1,074,225.6 If all of our respondents filed bankruptcy
petitions, 7 this would represent more than 4.21 percent of all new cases filed for the period, and is a statistically significant and relevant sample. In June 2008, the IFL published its findings in a report entitled “2008 Annual Consumer Bankruptcy Demographics Report: American Debtors in a Recession.”8 The following is a summary of some of the findings from our research, as well as a comparison to the 2007 data. Gender
Of all the categories surveyed this particular one had a 100 percent participation rate. What was found was that 52.6 percent (23,801) of the filers were women and 47.4 percent (21,428) were men. Last year, 52.8 percent were women and 47.2 percent were men. This year we are beginning to see a closer alignment with their respective representations within the U.S. population. In 2007, women comprised 50.7 percent of the population, according to the U.S. Census Bureau.9 What is of interest is the difference between women seeking counseling and/or education as compared to men. This variance has been consistent since
the IFL began reporting out this data in 2006. It is unlikely this statistic is being affected by the recession. Age
A total of 45,056 participants answered the age question, a 99 percent response rate. Of these, 2.2 percent (1,004) were 18-24 years old; 19.5 percent (8,785) were 25-34 years old; 29.4 percent (13,256) were 35-44 years old; 26 percent (11,698) were 45-54 years old; 15.6 percent (7,001) were 55-64 years old; and 7.3 percent (3,312) were 65 years of age or older. See Table 1 for a comparision of this data. Compared to IFL’s report last year, the baby boomers (those 44-63 years old) are being hit the hardest right now. This age group saw a collective statistical increase in filings of almost 2 percent in one year. A review of previous years’ data revealed no other drastic shift for a generation in one year as for this group in 2008. It seems fair to attribute this statistical change to the recession. Ethnicity
A total of 44,577 participants answered the ethnicity question, which was a 99 percent response rate. Of these, 12.5 percent (5,572) selected African American/Black; 73.3 percent (32,699) selected Caucasian/White; 7.4 percent (3,292) selected Latino/Hispanic; 3.6 percent (1,589) selected Asian; 0.08 percent (339) selected Native American; and 2.4 percent (1,086) selected Other. See Table 2 for a comparision of this data. There was a significant increase in the 2008 filing rates for both Caucasians and Asians. The recession may be directly connected to this outcome, since both groups have seen an increase by one percent or more, which is statistically relevant. Additionally, the Hispanic population has also seen an increase, though it should be noted that this variation may be a result of differences in the data collection instruments. The IFL respondents may choose only a single ethnicity category, while the U.S. Census Bureau allows those of Hispanic origin to choose a second appropriate ethnicity category, so our respondents may in fact identify with another category.
5 Deborah Thorne, et al., “Generations of Struggle,” AARP Public Policy Institute #2008-11(2008). 6 The U.S. courts reported a total of 1,117,771 cases filed in 2008. Of these, 43,546 were business filings and exempt from the credit counseling and financial education requirement.
7 Nearly 91 percent of credit counseling clients received a recommendation to consult an attorney based on their financial condition. All financial management education clients are bankruptcy debtors. 8 Available at www.financiallit.org. 9 See http://quickfacts.census.gov/qfd/states/00000.html.
Table 1: Comparison of Age Group Data
Table 2: Ethnicity
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A total of 44,667 participants answered the question regarding their highest level of education completed, a 99 percent ABI Journal
response rate. Of these, 5.3 percent (2,387) identified at the graduate level; 12.3 percent (5,508) identified at the bachelor’s level; 8.6 percent (3,818) identified at the associate level; 29.4 percent (13,137) identified at the some college level; 38.5 percent (17,226) identified at the high school/GED level; 5.2 percent (2,288) identified at the primary school level; and 0.7 percent (303) identified themselves as having no education. Those with either a bachelor’s or associate’s degree appear to have suffered the most during the recession, with significant increases in filings in 2008. Those with bachelor’s degrees increased by a full percentage point, while those with associate’s degrees increased by 0.6 percent. Although statistically those with either some college or a high school diploma make up the greatest percentage of filers, both categories saw a decrease in their percentages. It raises the question of whether this was a “white collar” recession. Are those in professions requiring college education more affected than those working in the trades? It seems the answer to that question can be found in the daily headlines, which seem to show more white-collar jobs lost in this recession than blue-collar jobs. Personal Income
Individuals were asked to state their annual personal income10 and 97 percent responded (the lowest participation rate on the survey). A total of 43,499 participants answered the incomelevel question. Of these, 37.1 percent (16,148) identified as earning less than $20,000; 21.9 percent (9,520) identified as earning $20,000 to $30,000; 16 percent (6,983) identified as earning $30,000 to $40,000; 10.4 percent (4,509) identified as earning $40,000 to $50,000; 6.5 percent (2,798) identified as earning $50,000 to $60,000; and 8.1 percent (3,541) identified as earning more than $60,000. See Table 3 for a comparision of this data. The recession does appear to be having an effect on the higher-income levels, while those who earn less then $30,000 saw a decrease in filing rates (though they still make up the majority of filers). Those with incomes below $30,000 filed at rates 2.6 percent lower than their 2007 counterparts. Those who earned $40,000 or more saw an increase in filing rates of 2.5 percent. Of particular note, participants earning $60,000 or more saw an increase of 1.2 10 It should be noted that individuals are disclosing household income on their bankruptcy petitions, and therefore these numbers will differ.
percent. This indicates that the recession is having an impact on higher-income earners and sending more of them to seek bankruptcy protection. Employment Status
A total of 45,002 participants answered the employment question, a 99 percent response rate. Of these, 63.4 percent (28,528) selected employed; 13 percent (5,861) selected unemployed; 8.7 percent (3,908) selected retired; 9.9 percent (4,428) selected selfemployed; 4.2 percent (1,909) selected homemaker; and 0.8 percent (368) selected student. See Table 4 for a comparision of this data. Compared with IFL’s 2007 report, the category of employment status that saw the most change during 2008 was self-employment, which increased by 0.9 percent. This may indicate that those individuals who are working for themselves are struggling more and have to increasingly seek protection in bankruptcy as their businesses falter. Additionally, those who identified as unemployed increased by 0.4 percent this past year. As a result of the recession, the national unemployment rate increased from 4.9 percent in January 2008 to 7.2 percent by December 2008. 11 This suggests that the recession has had an impact on this demographic as well.
The additional question is: Was the significant shift in the self-employment category due to small and micro business failures, and what were the demographics of that? As this question is beyond our capacity to answer, we pose these questions to the academic and research community for additional inquiry. Marital Status
A total of 45,113 participants answered the marital-status question, a 99 percent response rate. Of these, 62 percent (27,955) identified as married; 18.6 percent (8,377) identified as single; 15.3 percent (6,913) identified as divorced; 3.3 percent (1,500) identified as widowed; and 0.8 percent (368) identified as cohabitating. The recession clearly took a toll on married couples in its first 12 months. The increase from 2007 to 2008 of 2.3 percent shows that married households had greater financial struggles than their single counterparts. Additionally, the Administrative Office of the U.S. Courts (which gathers bankruptcy court statistics) reports that 32 percent of all nonbusiness bankruptcy cases were filed as joint cases (husbands and wives) for 2008, an increase from 30.4 percent in 2007. Both the AOUSC and IFL are seeing a trend of more married couples seeking protection in bankruptcy during the recession.
11 Department of Labor, Bureau of Labor and Statistics Unemployment Rate, Labor Force Statistics from Current Population Survey.
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Table 3: Self-Identified Income
Less than $20,000
More than $60,000
Table 4: Employment
0.9% December/January 2010 75
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Causes of Financial Distress
During the credit-counseling process, clients are asked to pick from a list of common causes of financial distress to describe their current financial situation. Clients are encouraged to choose more than one cause when describing their situations, and therefore the percentages will equal more than 100 percent. See Table 5 for a comparision of this data. The most noticeable impact the recession has had on the causes for debtors’ financial distress is the frequent selection of the “Overextended on Credit” category. This may be the “credit crunch” headlines, since these may be individuals who are unable to access additional credit cards or home-equity loans, who then find themselves having to deal with their financial reality and personal insolvency. This single category saw an increase of 3.4 percent in the past year.
Another category that shows a significant increase is “Reduction of Income,” where debtors indicated a 1.7 percent increase in the past year. However, “Job Loss” did not show as significant a change as one might have expected during a recession. Another interesting category to note is that “Illness/Injury” adjusted back down to 33 percent (it was 32.7 percent in 2006) after spiking in 2007 at 35.9 percent. This has been a category of particular interest to policymakers, academics and members of the consumer and financial sectors. It does not appear that the recession has had a direct impact on debtors in this area.
Who is the Class of 2008, and how did the Great Recession impact them? Like last year’s alumni, the majority of the IFL’s clients were Caucasian, married, employed, between 35-44 years
Table 5: Causes of Financial Distress
Causes for Financial Distress
Overextended on Credit
Reduction of Income
Birth/Adoption of Child
Death of Family Member
old, had at least a high school education if not some college and made no more than $30,000 per year. The Great Recession appears to have had an impact on the following demographic groups: those Americans who are 45-64 years old, Americans of Asian and Caucasian descent, those with an educational background of an associate or bachelor’s degree, Americans earning $40,000 or more per year and Americans who are self-employed. The IFL found that Americans who are married filed at higher rates than in years past. As to the causes for their financial distress, more Americans were reporting “Reduction of Income” as an increased reason for their filing bankruptcy. The four primary causes of financial distress still remain (1) overextended on credit, (2) unexpected expenses, (3) reduction of income and (4) job loss. The demographics research conducted by the IFL will be ongoing, with annual reporting to track any changes in those who are financially distressed. The IFL has also begun some longitudinal research looking at the impact of BAPCPA’s mandated credit counseling and debtor education on general comprehension of basic personal finance principles. The IFL’s demographics research is an annual snapshot opportunity that highlights areas of interest for further study. The insolvency and academic community are invited to approach the Institute for Financial Literacy with both research questions and partnership opportunities. n
Copyright 2009 American Bankruptcy Institute. Please contact ABI at (703) 739-0800 for reprint permission. 76 December/January 2010