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Article Excerpt
Studies have shown that a growing number of divorced women were experiencing debt repayment problems during the 1980s. This study uses data from the Panel Study of Income Dynamics to (1) examine how debt repayment problems differ by marital status and gender and (2) investigate the role that supplemental income payments play in helping to mitigate repayment problems. The results show that divorced men and women are more likely to default on their debt obligations than married households. Further analysis reveals that increases in welfare payments significantly decrease the likelihood of default for divorced women but do not affect the probability of default for divorced men and married households. There is no evidence that payments related to child support and alimony affect default rates. The findings suggest that welfare benefits may help to mitigate the economic consequences of divorce for women.
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Loan delinquency and charge-off rates have been rising since 1990, and there has been a twofold increase in the number of personal bankruptcy filings (American Bankruptcy Institute 2005). Research indicates that the rise in household repayment problems has occurred at a significantly higher rate for divorced households than for married households (Sullivan and Warren 1999a, 1999b; Sullivan, Warren, and Westbrook 1995, 2000).
The literature, which investigates the economic consequences of divorce, provides some plausible explanations (i.e., Del Boca 1994; Duncan and Hoffman 1985, 1988; Smock 1993; Zagorsky 2005). These studies find that men and women experience a significant decline in income, wealth, and credit access upon divorce. And, lower levels of income and wealth and higher levels of debt are associated with higher levels of default and bankruptcy (e.g., Fay, Hurst, and White 2002; Stavins 2000). If the divorced individual defaults or goes bankrupt, it can have long-term effects as well, because both can affect an individual's credit record and thus future access to credit (Fisher, Filer, and Lyons 2004; Musto 2004). For women, the effects of divorce can be even more serious if a poor credit history affects their ability to get a job, rent or buy a home, or purchase a vehicle.
After divorce and during other times of financial need, households often turn to government assistance. Sullivan, Warren, and Westbrook (1989) find that nonmarried women who file for bankruptcy have only slightly lower total income than nonmarried nonfilers ($10,600 versus $14,100, respectively). However, nonmarried woman who file for bankruptcy receive significantly less in supplemental income than do nonmarried nonfilers--in fact, 75% less. According to Sullivan, Warren, and Westbrook (1989), fliers receive $500 annually from child support, alimony, and government assistance, while nonfilers receive $4,200. These findings suggest that supplemental income payments may lower the likelihood of household repayment problems for nonmarried women, especially those who are divorced.
Thus, differences in the sources of income received by households by gender and marital status may have varying impacts on the likelihood a household defaults on its debt obligations. Why might the repayment ability depend on the sources of income rather than just total income? Graham and Belier (1989) find that equal increases in Aid to Families with Dependent Children (AFDC) and child support have differing impacts on women's labor supply, with child support decreasing labor supply by a significantly smaller amount than AFDC. These results suggest that some households may treat AFDC and child support and alimony differently, which may mean that their effect on the probability of default may also vary in magnitude.
The increase in the number of divorced households experiencing repayment problems, coupled with differences in levels of supplemental income, raises important questions. First, can supplemental income payments help to mitigate the likelihood of delinquency and bankruptcy, especially for divorced households? Second, are there factors that affect the probability of delinquency and bankruptcy differently based on marital status and gender?
This study uses 1991-95 data from the Panel Study of Income Dynamics (PSID) to examine how and why default rates differ for divorced men and women and married households. Specifically, it investigates the role that supplemental income payments (i.e., welfare payments, child support, and alimony) play in helping to mitigate repayment problems for divorced women.
It is important to note that since our data cover the period 1991-95, we are only able to look at the effect of welfare benefits for AFDC. However, documenting the impact that AFDC benefits have on default rates has important policy implications for the current welfare system, Temporary Assistance to Needy Families (TANF), which replaced AFDC in the late 1990s. It is of interest to discuss how the results under AFDC might apply to the current system given tighter eligibility restrictions and the fact that real average benefits have decreased since the transition to TANF (U.S. House of Representatives 2004).
The findings also have important implications for financial professionals and consumer educators who provide financial education and other services to low-income and divorced families. If supplemental income payments are found to reduce household repayment problems, there may be a need for more programs and resources that specifically educate low-income and divorced families about debt management strategies and various supplemental income payments, especially government assistance programs.
THE LITERATURE
Past studies have identified marital status as a significant contributor to U.S. household repayment problems, suggesting that being married significantly decreases the probability of delinquency and bankruptcy (Black and Morgan 1999; Canner and Luckett 1991; Fay, Hurst, and White 2002; Lane 1969; Stavins 2000). Additional research has found that a growing number of nonmarfied households are experiencing financial difficulties and that the growing proportion is divorced women (Sullivan and Warren 1999a, 1999b; Sullivan, Warren, and Westbrook 1995, 2000). This research is limited, however, in that the analysis is primarily univariate and provides little insight into why divorced women may be having more difficulty paying their bills and/or repaying their debts than married households and divorced men.
Studies of the economic consequences of divorce find that men and women experience a significant decline in income, wealth, and credit access upon divorce (i.e., Del Boca 1994; Duncan and Hoffman 1985, 1988; Smock 1993; Zagorsky 2005). The decline is more severe and long term for women than for men. There are several reasons why the economic consequences of divorce may be more severe for women than men. First, most men who separate or divorce are immediately made better off financially because they are able to retain most of their labor income and no longer have to provide for the same level of needs of their former family size (Del Boca 1994; Duncan and Hoffman 1985, 1988). Second, many women do not establish a credit history in their own names while married and upon divorce have difficulty borrowing. Finally, and perhaps most importantly, women are typically awarded custody of the children. The added responsibilities associated with children reduce the woman's labor supply, limit her human capital investment, and lower her potential earnings. Moreover, women are often granted inadequate support payments upon divorce and/or are unable to collect what they are awarded (Del Boca 1994; Weiss and Willis 1985). They frequently turn to government assistance.
Del Boca (1994) and Gruber (2000) find evidence that AFDC and child support payments help divorced women smooth their consumption and ease the economic consequences of divorce. It is reasonable to hypothesize that these payments may also help them to pay their bills and/or repay their debts. For women receiving these payments, the end result may be lower default rates. The existing literature that has examined these issues focuses on the relationship between bankruptcy and government transfer payments. Interestingly, two of these studies find that increases in transfer payments result in an increase in bankruptcy filings (Buckley and Brinig 1996; Shepard 1984). These studies, however, rely on aggregate data. Until recently, household-level data containing information on delinquency, bankruptcy, and income did not exist. Fisher (2005) has been among the first to use microlevel household data from the PSID to examine the effect of transfer benefits on the probability of bankruptcy. He finds that increases in average unemployment insurance (UI) benefits decrease the probability of bankruptcy, while AFDC has no significant effect on bankruptcy.
Microlevel data can provide a better understanding of how supplemental income payments can affect the extent and severity of repayment problems across households that differ economically and demographically. Given limited data on household repayment problems, it has been difficult to pursue this line of research. Moreover, studies that have used microlevel data from the PSID have focused solely on bankruptcy (i.e., Fay, Hurst, and White 2002; Fisher 2005) and have not used the information on default found in the PSID.
This study contributes to the literature using both the bankruptcy data and an additional series of questions related to household repayment problems not previously investigated in the PSID. The goal is to lay a foundation for exploring in more detail the recent increase in the proportion of divorced women experiencing household repayment problems and to provide plausible explanations for this difference.
The remainder of this paper is structured as follows. The...
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