BUSINESSWEEK ONLINE : FEBRUARY 19, 2001 ISSUE
ECONOMIC TRENDS Bankruptcy? So What? That perception may raise defaults If the economy was so strong in the '90s, why did the number of personal bankruptcies double (chart)? The conventional view is that lenders eased loan standards and threw credit cards at consumers. But a different story is told by economists David B. Gross of Lexecon Inc., a consulting firm, and Nicholas S. Souleles of the Wharton School in a paper delivered last month at the American Economic Assn.'s annual meeting. They attribute the trend to less ''social stigma'' in filing for bankruptcy. Gross and Souleles use a sample of about 300,000 credit-card accounts to study the burst of bankruptcies between 1995 and 1997, the fastest-growing default period of the decade. Since their sample gives detailed information on credit risk and payment histories, they can test whether the rise in bankruptcies was caused by an increase in risky customers getting credit. It was not: Bankruptcies went up even after adjusting the data for looser credit standards. What made individuals more likely to file than in the past? Gross and Souleles argue that in the mid-1990s, it became easier to get information about bankruptcy, in part because lawyers began to aggressively advertise their services. But the authors also point to a decline in the shame associated with bankruptcy. People seem to be learning that filing for bankruptcy isn't so terrible: Perhaps ''the scarlet letter associated with bankruptcy is disappearing,'' says Souleles. He adds that bankruptcies eased in the late 1990s mainly because of the economy's ''superfast'' growth. The economists' paper adds fuel to the debate over the need for legislation to make bankruptcy less attractive. It also suggests the bankruptcy numbers will swell if the economy continues to slow. In fact, the rise may have already started. According to Visa International, bankruptcies for the first four weeks of 2001 were up 30% over the same period a year ago. By Charles J. Whalen _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Bankruptcy? So What? CHART: Bankruptcies Still Sky-High INTERACT E-Mail to Business Week Online

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