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Saturday, December 24, 2005

Natural Disasters and Bankruptcy

As you would expect, bankruptcy filings increase following a natural disaster. The effect is even more pronounced when the disaster hits lower income areas:

Natural Disasters and Bankruptcy, A Perspective, by Elizabeth Warren, Boston Fed: ...When there is a series of major disruptions like the 2005 hurricane season, hundreds of thousands of middle class families may deplete their savings and turn to credit cards to supplement the aid they receive from charities and the government. Additionally, victims of natural disasters often return home to find that they have lost substantial assets. Insurance may cover some of the damage, but insurance companies’ liability is often limited. Every aspect of a family’s financial circumstances is exposed to the effects of a natural disaster.

Many disaster victims eventually turn to bankruptcy. It is possible to analyze bankruptcy filing data following hurricanes of the past 25 years, but limitations in the data make the tools blunt. The filings can be compared only year by year, not quarter by quarter. More important, the long-term data are available only on a state-by-state basis. To Robert Lawless, a professor at the University of Nevada at Las Vegas, that seemed problematic. A hurricane that hit Houston, for example, might have no effect on families and small businesses in El Paso, Dallas, or Austin. In order to detect a difference statistically, the regional effects would have to be large enough to change the bankruptcy filing numbers for the entire state. As a result, when Lawless decided to analyze the data, he expected to find no statistical correlations. ...

In fact, Professor Lawless discovered that in the three years following a hurricane, the growth in bankruptcy filings is about 50 percent higher in states that have suffered a direct hit. In the same time period, the growth in nearby states is about 20 percent higher. The data show that the location of the disaster also is significant. When the damage occurs in regions where there are many low-cost homes, FEMA payments are lower, and there is a corresponding increase in bankruptcy rates. The highest increase in bankruptcy filings in the past 25 years occurred when Hurricane Elena hit Mississippi in 1985, resulting in a 71.8 percent bankruptcy- filing increase in the following three years. ...

[M]any people are likely to seek bankruptcy relief in the wake of the hurricanes. Some may just put it off. Indeed, Lawless’s data show that the largest effects from past hurricanes are felt in the third year after storms hit, suggesting that many families will recover as best they can, and then confront their overall financial condition. ...

    Posted by on Saturday, December 24, 2005 at 01:41 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (0)

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