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ESSAYS ON ISSUES
THE FEDERAL RESERVE BANK
OF CHICAGO
DECEMBER 1991
NUMBER 52
Chicago Fed Letter
Personal bankruptcies
in retrospect
Most analysts consider the sustained
increase in personal bankruptcies
during the last seven years to be like a
snow storm in the middle of the sum-
mer: it should not have happened.
This is because, although personal
bankruptcies are historically cyclical,
rising during recessions as unemploy-
ment increases and declining during
expansions (see Figure 1), the increase
in personal bankruptcies after 1984
occurred during a period of extended
economic growth.
Many proposed explanations for why
personal bankruptcies increased dur-
ing a period of national economic
upswing assume that the upward trend
in the number of personal bankruptcy
filings during most of the 1980s was
countercyclical. However, an alterna-
tive explanation is that personal bank-
ruptcies responded to a series of local-
ized economic downturns which took
place during the 1980s. This conclu-
sion is consistent with the claim that
personal bankruptcies continued to
follow a cyclical pattern. This explana-
tion is supported by the fact that al-
though the longest peacetime expan-
sion in the history of the U.S. econo-
my occurred post-1982, these years
were also characterized by severe re-
gional economic shocks, which caused
personal bankruptcies to fluctuate
accordingly.
An analysis of personal bankruptcies
by state shows that, outside periods of
national economic recessions, increas-
es in personal bankruptcy filings dur-
ing the past decade were more ex-
treme in regions hit by negative eco-
nomic shocks. Although the down-
turns of the 1980s were contained
within specific regions of the country,
their consequences were very damag-
ing and often spilled over to different
sectors of the economy, causing a
more widespread financial distress.
The fact that personal bankruptcy
filings advanced also at the national
level during this period attests to the
severity of such localized recessions.
Moreover, the Bankruptcy Reform Act
of 1978, which made it easier to file for
bankruptcy, and an unprecedented
accumulation of household debt in
the 1980s somewhat exacerbated the
increase in personal bankruptcy filings
during these periods of localized eco-
nomic downturns.
1984-1986: the strain on farmers
and the oil price plunge
After increasing at the onset of the
1981-1982 recession, personal bank-
ruptcy filings declined, following their
cyclical pattern. The downward trend
was reversed, however, when personal
bankruptcies jumped 20% in 1985 and
32% in 1986 (see Figure 2). The in-
creases appeared to be countercyclical
since, by 1985, the civilian unemploy-
ment rate had fallen to approximately
7% from double-digit rates in 1982,
and the real economy was growing at
an annual rate of 3.4%. Despite the
general climate of well-being, two
major economic shocks took place
during the 1984-1986 period: farmers
experienced deep and prolonged
financial problems, and the 1986
plunge in oil prices led to a recession
in the Oil Patch states.
These localized economic disturbanc-
es forced a number of firms in the
affected sectors of the economy to
reduce both output and workers. As a
result, in 1986, the economy’s real
growth slowed to 2.7%, and employ-
ment in the goods-producing sector
fell by 300,000 jobs. Also, although
the national civilian unemployment
rate continued to fall, unemployment
rates in the states most affected by the
localized economic downturns in-
creased. Because personal bankrupt-
cies are sensitive to fluctuations in the
unemployment rate, as unemployment
increased in the distressed states, so
did the number of bankruptcy filings.
In the early 1980s, the agricultural
sector experienced severe financial
problems, mainly due to a decline in
U.S. farm exports. At the beginning of
1985, over 12% of all U.S. farms were
considered financially distressed by the
U.S. Department of Agriculture, with
60% of such farms concentrated in the
Corn Belt, the Great Lakes states, and
the Plains.1 Moreover, the adverse
effects of this difficult economic situa-
tion soon spilled over to agriculture-
related industries, creating a more
widespread economic disturbance.
In 1985, personal bankruptcies rose
20% at the national level. However,
increases were clearly more dramatic