Olin Business School Study Shows People Use Tax Rebate to File for Bankruptcy

    ST. LOUIS, MO, April 14, 2012 /24-7PressRelease/ -- With the cost of filing for bankruptcy going up, many cash-strapped American families are using their tax rebate to pay for it, finds a new study by a professor of finance at Olin Business School, Washington University in St. Louis.

Results of the new research are published as a National Bureau of Economic Research working paper by Jialan Wang, PhD, assistant professor of finance at the Olin Business School at Washington University in St. Louis, and colleagues at Columbia University's Mailman School of Public Health and the University of Chicago Booth School of Business.

The researchers looked at the relationship between tax rebates and bankruptcy filings in 2001 and 2008, two years when many Americans received rebate checks. Total bankruptcies increased by about two percent after the 2001 rebates, and by seven percent after the 2008 rebates.

This uptick, Wang says, follows the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act legislation. The new law raised legal and administrative fees from an average of $921 to $1,477 and mandated credit counseling paid for by the filer. As a result, the number of bankruptcy filings quickly fell by more than half, although they have since rebounded to near pre-2005 levels.

The new rules have been hotly debated. Do they screen-out spurious and unneeded bankruptcies, or do they act as a barrier to those most in need?

Wang says her new research supports the latter scenario.

"The 2005 law assumed that rising bankruptcy levels were caused by abuse of the system by wealthy debtors, but the recession has caught many households in a rising tide of unemployment and foreclosure through no fault of their own," Wang says. "According to our research, bankruptcy fees prevent the most financially distressed households from being able to file, and tens of thousands of households will have trouble saving up for bankruptcy in 2012."

There are reasons to be troubled by today's high bankruptcy rates, Wang says.

More than 1.3% of all U.S. households filed in 2011. However, "rising bankruptcy rates are likely to be driven by the explosive growth in overall consumer debt," she says, "not by abuse of the system as the 2005 law assumed."

Wang concludes that we can only fix America's bankruptcy problem by eliminating excessive consumer credit, not by adding insult to injury for households that are already broke.

For more information, read the story at Olin Business School's website and visit Professor Wang's blog.

Olin Business School website: http://www.olin.wustl.edu

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