Extreme Spending – Not Dire Straits – Fuel Personal Bankruptcies

Household bankruptcy filings have spiked over the past two decades. According to the American Bankruptcy Institute, 412,510 personal bankruptcies were filed in 1985 compared to 2,039,214 in 2005. During that period, personal bankruptcies rose from 0.3 percent to 1.8 percent of all U.S. households. Bank and credit card companies have reportedly lost tens of billions of dollars every year as a consequence of the upward trend in consumer bankruptcy filings. The ripple effect of the current credit crisis continues fuel filings. But what else is pushing families to the economic brink? Why have personal bankruptcies skyrocketed in the 2000s versus the 1980s (during which time the U.S. experienced a full blown recession)? Assistant Professor Ning Zhu has tackled these questions in his working paper, “Household Consumption and Personal Bankruptcy,” which is based on an analysis all personal bankruptcy filings in Delaware in 2003. Zhu also collected data from the Federal Reserve Board’s Survey of Consumer Finance (SCF), which asks respondents nationwide about household consumption and whether they have ever filed for bankruptcy. Zhu used the SCF’s data to compare the spending patterns of households that filed bankruptcy to those which had not. He found that credit card debt and spending on durable goods, such as housing and automobiles, spur the greatest number of bankruptcy filings. While unexpected medical expenses have an impact on households, Zhu found it only accounts for five percent of bankruptcies. Similarly, unemployment leads to only 13 percent of bankruptcies. He discovered that even though the households that filed bankruptcy tended to have less income than those households that did not file bankruptcy, their consumption patterns appeared to be the same or more extreme. Zhu concluded that the households with greater consumption debt are more likely to file under Chapter 7, enabling them to walk away from those liabilities. He argues for bankruptcy law reform that reserves Chapter 7 bankruptcy filings to households impacted by unexpected medical costs or unemployment, not overconsumption. Zhu presented the paper at Yale University’s Behavioral Finance Conference last May.

Most recently, Zhu won the best paper award at the Cass School of Business’s second annual Emerging Markets Group Conference on Emerging Markets Finance in London on May 15-16, where he presented his study, “Does Bank Ownership Increase Value: Evidence from China.” The conference was co-sponsored by the International Monetary Fund.

Zhu to Head Quant Strategies at Lehman Brothers Asia

In July, Zhu will be promoted to associate professor and will begin a year-long sabbatical to serve as head of quantitative strategies for Lehman Brothers (Asia) in Hong Kong. At the multi-national investment bank, his role will include developing quantitative strategies and investment models for Lehman’s internal proprietary trading desk and for large local clients such as sovereign, mutual and hedge funds.


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