“We’re told that if you do go and get advanced education, you’re going to be almost guaranteed this economic success,” said Leslie Linfield, the group’s executive director. But the recession proved that “higher education was no guarantee that you weren’t going to be at risk.”
According to government data, bankruptcies spiked in the years following the financial crisis, peaking at 1.5 million in 2010. Robert Lawless, a bankruptcy professor at the University of Illinois College of Law, attributed the rise in filings to the contraction in available consumer credit as lenders tightened underwriting standards and lowered loan limits. That left a wide swath of cash-strapped consumers with no way to continue financing their lives.
“As consumer credit tightens, people run out of options,” he said.
The government does not track filers’ demographic data. But Linfield said the groups that have historically been most affected are low-income consumers without college degrees. They still account for the largest share of bankruptcy petitioners: Linfield’s research found about 38 percent of debtors make less than $20,000 and about a third have only a high school diploma.
But Linfield said the recent increase in the number of bankruptcy filings is driven largely by wealthier, more-educated households. The percentage of debtors with bachelor’s degrees peaked in 2009 and then inched down in 2010. Those with graduate degrees jumped from 4.9 percent in 2006 to 6.7 percent last year. And the share earning more than $60,000 rose from 5.5 to 9.2 percent.
Linfield said she is also concerned about the age of debtors. Over the past five years, the number of consumers filing for bankruptcy between ages 18 and 34 has fallen 31 percent, her group’s study found. Meanwhile, the number of people 55 and older, who have less time to recover financially, has jumped 25 percent.
The group surveyed more than 50,000 consumers who participated in its credit counseling or financial education courses, a requirement for those seeking bankruptcy protection. They account for roughly 3 percent of bankruptcies filed in 2010.
Typically, credit cards and other unsecured loans force most people into bankruptcy, Linfield said. But she thinks hefty mortgages and falling home values contributed to the spike in filings among wealthier households and college graduates. More than 70 percent of consumers in Linfield’s survey said they were filing for bankruptcy protection because they were overextended in credit, up from 63 percent in 2006. Reduction in income moved from third to second place.
Linfield said those trends may change this year as the overall number of bankruptcies begins to ease. According to government data, the number of filers for the year ended in June dropped 2 percent from the previous year. Monthly data from the American Bankruptcy Institute, an industry research group, showed August bankruptcies dropped by 11 percent from a year ago. Samuel Gerdano, executive director of ABI, attributed the decline to a slowdown in spending as consumers repair their personal balance sheets.
“They take a step back from the ledge, if you will, of needing bankruptcy protection if something bad happens,” he said.