Many cash-strapped American families are waiting on their tax rebate to file for bankruptcy, and this trend has gained steam as costs related to filing for bankruptcy have gone up.
Results of the new research are published as a National Bureau of Economic Research working paper by Tal Gross, PhD, an assistant professor of Health Policy and Management at the Columbia University's Mailman School of Public Health, and colleagues at the University of Chicago Booth School of Business and the Olin Business School of Washington University in St. Louis.
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 2% after the 2001 rebates, and by 7% after the 2008 rebates. This uptick, they say, follows the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act legislation, which 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? Dr. Gross says his new research supports the latter scenario. "Bankruptcy can be a Catch-22 when a substantial amount of money is needed to get out of situation defined by having little or no money. If it weren't for these rebate checks, many families would have to postpone filing for bankruptcy for months until they save enough money."
While bankruptcy is often seen in a negative light, Dr. Gross notes that it can be a boon—and not just to individual families. Bankruptcy allows for renewed spending, he says, acting as an economic stimulus. For these reasons, he says, lowering barriers to bankruptcy, as long as they don't encourage excessive consumer borrowing, would be a win-win.
Past research into the motivations for bankruptcy has focused on two areas—the role of short-sighted behavior (a shopping spree) and unanticipated events (a 2010 study by Dr. Gross found that approximately 26% of bankruptcies are driven by medical costs). The new paper may be the first to look at how new filings are affected by high filing costs combined with low cash. This "liquidity constraints" approach, he says, can also be used to study other social benefits like disability and unemployment insurance.
"This research provides a valuable look at the causes and consequences of bankruptcy for families as they make decisions that affect their health and financial security," says Michael Sparer, chair of Health Policy and Management at the Mailman School.
About Columbia University's Mailman School of Public Health
Founded in 1922 as one of the first three public health academies in the nation, Columbia University's Mailman School of Public Health pursues an agenda of research, education, and service to address the critical and complex public health issues affecting New Yorkers, the nation and the world. The Mailman School is the third largest recipient of NIH grants among schools of public health. Its 300 multi-disciplinary faculty members work in more than 100 countries around the world, addressing such issues as infectious and chronic diseases, environmental health, maternal and child health, health policy, climate change & health, and public health preparedness. It is a leader in public health education with over 1,000 graduate students from more than 40 nations pursuing a variety of master's and doctoral degree programs. The Mailman School is also home to numerous world-renowned research centers including the International Center for AIDS Care and Treatment Programs (ICAP), the National Center for Disaster Preparedness and the Center for Infection and Immunity. For more information, please visit www.mailman.columbia.edu