Bankruptcy: Comparing Ourselves With Our Neighbor to the North

I've been meaning to blog this Fraser Institute study on medical bankruptcy, which compares bankruptcy rates in the US and Canada, and finds that medical bankruptcies can't be driving the US rate, because the Canadian bankruptcy rate is . . . higher.

What I immediately thought, when I saw the study is, "But 2006 and 2007 are not representative years".  The 2005 bankruptcy reform caused everyone who even thought they might need to file bankruptcy to file in 2005, before the reforms kicked in.  That artificially depressed the rate of personal bankruptcy in 2006 and 2007.  That's why David Himmelstein, Elizabeth Warren et al picked 2006 for their execrable study claiming that most bankruptcies in America are medical--medical bills are harder to see coming than an unsustainable mountain of credit card debt, or a business failure (in a boom year).  Now the right apparently wants in on the con.

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But I didn't get around to it, and the thing slipped my mind, and now I see that Credit Slips did the legwork some time ago, which is a lesson to you children:  the early bird gets the worm!  And it turns out that yes, the US bankruptcy rate is normally higher than the Canadian bankruptcy rate.

But here's the odd thing:  it's not very much higher.  Which is strange because, first, US bankruptcy law is still more generous than the Canadian code, and second, they're not supposed to have any medical bankruptcies, because they're not really supposed to have any substantial medical bills.  So if so much of our bankruptcy is driven by medical bills, it should be much, much higher, not 30 basis points.

Interestingly, it turns out that research commissioned by the Canadian government shows that 15% of people over the age  of 55 who declare bankruptcy cite a medical problem as the primary reason.  Medical bankruptcies can, as I've been saying for a while, be driven by something other than the lack of free government provided medical care.

Still, the narrowing of the gap is unexpected, and worth watching.  Of course, if the differences in bankruptcy go back up to pre-2005 levels, then it will stop being surprising.  But though rates are rising sharply in the recession, the latest numbers are still below comparable rates in 2005 and 2006.  And presumably bankruptcies are up at least somewhat in Canada as well.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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