Bankruptcy? Rest easier

Gregory Nemec

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Due to the pandemic, “there’s every reason to believe there’ll be an increase in the number of personal bankruptcies,” says Paul Goldsmith-Pinkham, assistant professor of finance at the School of Management and an expert on debtor protection policies and the role of consumer debt.

Goldsmith-Pinkham and his colleagues wanted to know what a bankruptcy filing might mean for the future job prospects of individuals who seek debt relief through bankruptcy.

They examined employment data for those filers before and after the Great Recession of 2008. In an analysis soon to be published in the Journal of Finance, the researchers report good news for anyone worried about having a bankruptcy flag on their credit report. “To potential employers, it’s just not a big deal,” says Goldsmith-Pinkham.

The research team examined credit bureau and Social Security Administration data on several hundred thousand people from the years 2002 to 2011. They compared two groups: those who’d filed for bankruptcy under Chapter 7, whose flags remained on their credit reports for ten years; and those who’d filed under Chapter 13 and had their flags removed after seven years. The finding: in the three-year period following Chapter 13 removal, the two groups had very similar employment outcomes.

“Psychologically, people take bankruptcy very hard, but the benefits of doing this can be large,” says Goldsmith-Pinkham. “We’ve found one reason to reduce stress: employers don’t see this as a scarlet letter.”