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Personal Bankruptcy: Causes and Consequences

This report reviews the current knowledge around personal bankruptcy, draws conclusions about its causes and consequences, and suggest directions for credit unions to follow in combating this growing problem.

Executive Summary

Filene Research Institute's Research Council identified bankruptcy as a high priority issue. Because of the varying and often conflicting viewpoints about the nature and extent of the problem and because of the substantial amount of misinformation about bankruptcy, Professors A. Charlene Sullivan and Debra Drecnik Worden were brought in to review the current body of knowledge on this subject. From this review, they have drawn conclusions about the causes and consequences of bankruptcy and suggested directions for credit unions to follow in combating this growing problem. 

What is this research about? 

Sullivan and Drecnik Worden show how the dramatic growth in personal bankruptcy is the result of broad economic, social, and demographic changes that impacted the market for financial services and altered the way consumers view consumer credit. They show how incentives associated with various alternatives affect the method financially distressed borrowers choose to resolve their financial difficulties. They then discuss the evidence on various types of incentives that credit unions might use to reduce the incidence of bankruptcy by their members.

What are the credit union implications?

Personal bankruptcy has become a serious problem for credit unions. Bankruptcy losses are especially troubling to credit unions, not only financially, but also philosophically. Because credit unions are mutual organizations, such losses do not fall on strangers, but are borne directly by the other members of the credit union - either through high loan rates, lower dividends or fewer services.