Preliminary Research on the Factors that Lead to Bankruptcy
On September 28, 2018, the Center for Business Analytics and Economic Research Director Michael Toma, Ph.D., delivered a presentation at the Coastal Bankruptcy Law Institute, Bankruptcy Seminar for Paralegals. His talk focused on factors that influence bankruptcy in coastal and central Georgia and across the United States. Locally, our team found that, for every one percent increase in unemployment rate, 34 more bankruptcies take place per month.
Another factor that could be having an impact on bankruptcy is student debt. For example, more than 42 million Americans collectively owe more than $1.5 trillion on students loans. In 2015, college students graduated with a debt that equaled about 74.3 percent of their starting salary out of school; comparatively, in 1990 that percentage was just 28.6 percent—nearly three times lower. In Georgia, nearly 60 percent of students graduate with debt totaling $28,600 and the Consumer Financial Protection Bureau estimates that one in four student borrowers is in default or struggling to stay current on student loan payments.
This could impact the next recession because the personal finances of people who had to borrow during their college years are already under pressure. On an aggregate basis, student debt has dramatically outpaced wage growth over the past 25 years. While median wages have gone up a scant 1.6 percent over that time frame, student debt has risen by 163.8 percent—a full 100 times the growth of wages. Toma says, in the next recession, student loan debt and the resulting bankruptcies will “come home to roost.”
Clearly, the smaller the debt burden, the decreased likelihood of falling into bankruptcy down the road. Minimizing debt and reducing exposure to market forces lessens the chance of landing in bankruptcy.