Academic journal article The Journal of Consumer Affairs

Gender Differences in Debt Repayment Problems after Divorce

Academic journal article The Journal of Consumer Affairs

Gender Differences in Debt Repayment Problems after Divorce

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? …

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