Surprise Study Findings: Bankruptcy Filings NOT Linked to Consumer Debt, Payday Loans
By Paul RizzoPayday Loan Writer
It would seem like a natural conclusion: The more people that apply for payday loans, the more bankruptcy rates will rise in the nation.
A study has found, however, that tightening of the U.S. bankruptcy law may actually be resulting in more bankruptcy filings. It goes on to note that an increase in unsecured debt isn’t always to blame.
Robert M. Lawless, an Illinois College of Law professor, examined the relationship between changes in federal bankruptcy law and the filing rates by consumer debtors, the school said Tuesday in a news release.
He found that the liberalization of the bankruptcy law in 1979 did not lead to a significant rise in bankruptcy filings, but the subsequent tightening of provisions in 1984 did. He did not speak specifically about payday advances, but some results imply certain conclusions.
More stringent bankruptcy laws, he wrote, can have the “perverse effect” of creating expectations of higher recovery rates from debtors by banks and other lenders, which then encourage the lenders to expand consumer credit, which can lead to more future bankruptcies.
Calling this the “paradox of consumer credit,” Lawless also noted that the widely accepted idea among experts that bankruptcy filings are directly linked to outstanding consumer debt might be misplaced. In other words: Don’t blame the faxless cash advance lender.
Instead, growth in consumer debt appears to be linked to short-term decreases in bankruptcy filing rates, followed by a rash of petitions.
“Desperate borrowing by financially strapped consumers postpones the day of reckoning,” Lawless said, but “mounting consumer debt catches up with consumers, and eventually leads to higher long-term filing rates.”
While there’s no doubt individuals should learn as much as they can about cash loans before applying - and there is a danger with these resources - it is also possible that they receive too much blame around the country.
