Consumer bankruptcy attorneys have long known that filing bankruptcy can relieve personal stress. Clients burdened with overwhelming debt are able to “start fresh” after bankruptcy without the stress of debt collectors chasing them. Now there is evidence that filing bankruptcy may actually lead to a longer and more prosperous life.
Recently, a paper published by the National Bureau of Economic Research (NBER) examined 500,000 bankruptcy filings in the United States to measure the effect of bankruptcy laws on consumers. The authors, economists Will Dobbie and Jae Song, found that filing Chapter 13 “increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, and decreases five-year foreclosure rates by 19.1 percentage points.” The authors postulate that filing bankruptcy can also eliminate the disincentive to work after a paycheck garnishment. Once a paycheck is garnished, some individuals may stop working because the benefits of receiving a reduced paycheck are outweighed by the costs of working. Bankruptcy can stop a paycheck garnishment cold, and in some cases return garnished money to the worker.
The study theorizes that bankruptcy can help people live longer due to decreased daily stress in their lives. Chapter 7 bankruptcy can quickly eliminate unpayable debts, usually within 4 or 5 months. Chapter 13 bankruptcy can help protect a car from repossession and a home from foreclosure while the individual reorganizes personal debts over three to five years.
While the many financial advantages of bankruptcy are well-documented, the NBER study highlights some benefits of bankruptcy that may be overlooked. Now the bankruptcy debtor can not only look forward to a fresh financial start after bankruptcy, but also a wealthier and longer life.