Abstract:
This paper examines households’ financial fragility by looking at their capacity to come up with $2,000 in 30 days. Using data from the 2009 TNS Global Economic Crisis survey, we document widespread financial weakness in the United States: Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. If we consider the respondents who report being certain or probably not able to cope with an ordinary financial shock of this size, we find that nearly half of Americans are financially fragile. While financial fragility is more severe among those with low educational attainment and no financial education, families with children, those who suffered large wealth losses, and those who are unemployed, a sizable fraction of seemingly "middle class" Americans also judge themselves to be financially fragile. We examine the coping methods people use to deal with shocks. While savings is used most often, relying on family and friends, using formal and alternative credit, increasing work hours, and selling items are also used frequently to deal with emergencies, especially for some subgroups. Household finance researchers must look beyond precautionary savings to understand how families cope with risk. We also find evidence of a "pecking order" of coping methods in which savings appears to be first in the ordering. Finally, the paper compares the levels of financial fragility and methods of coping among eight industrialized countries. While there are differences in coping ability across countries, there is general evidence of a consistent ordering of coping methods
Commentary:
This paper should serve as an effective counterpoint to the chorus of papers that conclude that Debtors file Chapter 13 bankruptcies for less than worthy reasons. Nearly 50% of all households would have difficulty coming up with $2,000, an amount that only slightly exceeds the average total cost of filing a Chapter 7 case, including attorneys’ fees, court costs, and filing fees, within 30-days. Filing a Chapter 13 case, often with total up-front costs being less than $400 (and some attorneys, including my firm, advancing even these costs), then becomes a far more rational choice.
This difficulty in obtaining emergency funds is exacerbated for bankrupt debtors, since one of the key ways the paper finds households access emergency funds is "via credit cards, home equity lines of credit, or loans on retirement accounts." For the bankrupt debtor, those sources are no longer available.
And for most debtors, filing bankruptcy is an emergency. Foreclosure, repossession, garnishment and the constant dunning of debt collectors are problems that often demand the immediate solution that bankruptcy provides.
Of additional pertinence in the bankruptcy context is the recommendation that short-term emergency saving should not be discouraged and, in fact, may deserved to be privileged like "long horizon saving", such as retirement, education, small business development and home ownership. The bankruptcy code and courts are clearly implicated in this, for example, as home retention and 401k exemption, contribution and loan repayment are provided extensive protections, but cash accounts are often find small exemptions (conditioned on a subjective "necessary" limitation") administrative freezes by banks, and hostility to budgets with "emergency" or "miscellaneous" line items. This paper would support more generous allowance of short term emergency savings, particularly as a means of increasing the discharge rates in Chapter 13.
For a copy of the opinion, please see:
Financially Fragile Households Evidence and Implications
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