UC Davis News: General Interest

Reckless Spending, Not Illness or Job Loss, Causes Most Bankruptcy
Fri, 29 Aug 2008 00:00:00 -0700
Simple overspending has driven most personal bankruptcies in recent years, a change from previous decades when illness and unemployment were major factors, concludes a new study from the University of California, Davis, Graduate School of Management. "The reasons people file for personal bankruptcy indeed have shifted during the past couple of decades," says Ning Zhu, the study's author and an associate professor of management at UC Davis. "Although our research supports the notion that adverse life events, like losing one's health or job, contribute to personal bankruptcy filings, excessive consumption contributes more to the recent increase in personal bankruptcy filing." According to the American Bankruptcy Institute, 2,039,214 personal bankruptcies were filed in 2005, up nearly five-fold from the 412,510 bankruptcies filed in 1985. Indeed, personal bankruptcies jumped from 0.3 percent to 1.8 percent of all U.S. households during the same period. The UC Davis study looked at all personal bankruptcy filings in Delaware in 2003, because the state was among the first to make its bankruptcy filings available through the Public Access to Court Electronic Record system and its demographics closely resemble those nationwide. The year 2003 was chosen because it allowed the study to follow cases to their conclusion, and permitted observation of filing patterns before 2005. (Filings may have been accelerated in the months leading up to October 2005, when the federal Bankruptcy Abuse Prevention and Consumer Protection Act took effect, by households wanting to avoid the new act's stricter requirements.) So that he could compare bankrupt households with solvent ones, Zhu also collected information from the Federal Reserve Board's national Survey of Consumer Finance about households that had never declared bankruptcy. Overall, Zhu concluded that debt accounted for more than 50 percent of recent bankruptcies, while medical problems caused just 5 percent and unemployment led to only 13 percent. Zhu found that bankrupt households have bigger mortgages, car loans and credit card balances than solvent ones, but make less than half as much money. Among bankrupt homeowners, mortgages were 3.21 times higher than annual household income, versus 1.73 times for solvent households. Auto loans were double the annual income for bankrupt households, versus 0.4 times for solvent households. And bankrupt households carried credit card balances that almost equaled their annual household income, while the average credit card balance for solvent households was 6 percent of annual income. In addition, bankrupt households had a median annual income of $25,738, versus $43,341 for solvent ones. (The median is the midpoint in a set of values; a median income of $25,738 for bankrupt households means that half of the bankrupt households in the study made higher salaries and half made less). Interestingly, more than 5 percent of bankrupt households owned at least one luxury automobile (average age of the car was 7 years), compared with 8 percent of solvent households (average age was 8 years). The study also suggests that some Americans deliberately spend beyond their means with the intention of using the bankruptcy system to erase some or all of their debt, and recommends reforms to discourage such abuse. "Our results emphasize that bankruptcy law reform should aim to address the issue," Zhu writes. "Current means test focusing on income, rather than consumption patterns or adverse events, may not set the best criteria for sorting out the households who truly need bankruptcy protection from those that consume beyond their means to take advantage of the system." The research has been presented at Boston College, the Massachusetts Institute of Technology, UCLA and Yale, and will be published in an upcoming issue of the Journal of Legal Studies, a publication of the University of Chicago Law School. The working paper is online at: http://www.gsm.ucdavis.edu/Faculty/Zhu/PersonalBankruptcy. Zhu earned his doctorate in finance from Yale in 2003. He specializes in individual behavior in financial markets, bankruptcy and distress, and investments.
"Strip-down" Could Ease Subprime Mortgage Crisis
Fri, 29 Aug 2008 00:00:00 -0700
Nearly all debtors who file for bankruptcy under Chapter 13 are homeowners, according to researchers at the University of California, Davis, Graduate School of Management and UC San Diego. Ning Zhu, an associate professor of management at UC Davis, and Michelle White, a professor of economics at UC San Diego, report their findings in a working paper, "Saving Your Home in Chapter 13 Bankruptcy," available online at http://www.gsm.ucdavis.edu/Faculty/Zhu/Chapter13. The researchers argue that even more debtors would save their homes rather than default if Chapter 13 permitted filers who owe more on their homes than the homes are worth to "strip-down" their mortgage obligation using a formula tied to the home's current fair market value and mortgage principal. The study examined all bankruptcies filed in Delaware in 2006. The authors argue that even more debtors would save their homes rather than default if Chapter 13 permitted filers who owe more on their homes than the homes are worth to "strip-down" the mortgage obligation using a formula tied to the home's current fair market value and mortgage principal. "Overall, introducing strip-down could save an addition 109,000 homes from default each year," Zhu says. "While that's a small number relative to the volume of foreclosures that may occur in the next year or two, introducing strip-down nonetheless could make an important contribution to solving the subprime mortgage crisis by providing a mechanism for saving homes from foreclosure when debtors wish to save their homes, even when lenders are unwilling to renegotiate or to consent to a refinancing." Zhu notes that foreclosures are costly not just to borrowers and lenders but to neighborhoods, because foreclosed homes tend to deteriorate and cause blight that pushes down housing prices and makes it difficult for other homeowners to refinance. This in turn leads to additional defaults by homeowners whose mortgages are "underwater" -- where the amount owed is higher than the value of the house. And as housing values drop, property tax revenues shrink, squeezing local government budgets.
How Temporary Help Agencies Impact the Labor Market
Fri, 29 Aug 2008 00:00:00 -0700
Temporary help agencies place nearly 3 million Americans in jobs each day -- but the temp industry's very success may embolden some managers to view all workers as impermanent, jobs scholar Vicki Smith argues in her latest book, "The Good Temp." "Labor Day is an opportunity to remind ourselves that we have a long way to go to address the risks and vulnerabilities that workers face in today's global economy," says Smith, a professor and chair of sociology at the University of California, Davis. In the "The Good Temp," Smith and her co-author, Esther B. Neuwirth, trace how temporary employment relationships have become mainstream in recent decades, and in some ways have contributed to the unraveling of the worker-employer contract. At the same time, the authors argue that temporary help agencies have also had positive impacts, including providing training to temps and offering opportunities that may lead to permanent jobs. "The Good Temp" is based on field work carried out in a temporary help agency in Silicon Valley. Understanding the temporary help industry, its rise and the "good temp" worker it produces is important to understanding today's economy, according to Smith. She notes that only about 30 percent of American workers today have one permanent, Monday-through-Friday, 40-hour-a-week job, and that the underemployment rate -- the proportion of workers who are over-qualified for their jobs or are working fewer hours than they prefer -- has reached nearly 10 percent. "Compared with the World War II era, when it was a marginal labor practice, temporary employment is today an entrenched feature of jobs and labor markets," Smith says. Smith's previous book is "Crossing the Great Divide: Worker Risk and Opportunity in the New Economy." She is a past chair of the American Sociological Association's Organizations, Occupations and Work Section and of the Society for the Study of Social Problems' Labor Studies Division. She earned her doctorate in sociology at UC Berkeley.

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