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77 Com. L.J. 360 (1972)
Effects of the Federal Minimum Exemption from Wage Garnishment on Nonbusiness Bankruptcy Rates

handle is hein.journals/clla77 and id is 358 raw text is: Effects of the Federal Minimum Exemption
from Wage Garnishment
on Nonbusiness Bankruptcy Rates
Philip Shuchman*
Gerald R. Jantscher**
of Washington, D.C.

T HE CONSUMER CREDIT Protection Act of 1968 estab-
lished a new federal minimum wage exemption from
garnishment of seventy-five per cent of the debtor's dis-
posable earnings, or a weekly amount equal to thirty times
the minimum hourly wage ($48), whichever is greater.
Legislative history was explicit on the problem of wage
garnishment: that the Congress accepted a causal con-
nection between harsh wage garnishment laws and high
levels of personal bankruptcies . . . The Congressional in-
tent was that the limitations on the garnishment of
wages . . . , will relieve countless honest debtors driven by
economic desperation from plunging into bankruptcy. ..-
That intent appears to have been generally realized as this
limited impact analysis shows.
The wage garnishment provision took effect on July 1,
1970. In some states the wage exemption already exceed-
ed seventy-five per cent, so in these the new law changed
nothing. In other states the new law effectively increased
the local wage exemption. This law gives us an opportunity
to test directly the inference that has been drawn from
analyses of wage exemptions and nonbusiness bankruptcy
rates: that high bankruptcy rates were generally associated
with low wage exemptions.2 If the relation is meaningful
a change in the size of a state's wage exemption should
be followed by a change in its nonbusiness bankruptcy
rate.
Our hypothesis is that in states whose wage exemptions
were not affected by the federal law, bankruptcy rates
should have increased more, or decreased less, during FT
1970 and 1971 than they did in states whose wage exemp-
tions were raised by the new law.3 Since the law became
effective at the end of FY 1970 and the beginning of FY
1971, this hypothesis can be tested with the bankruptcy
records for those two fiscal years. This is done by compar-

ing the changes in the bankruptcy rate 'between FY 1970
and FY 1971 in the two groups of states. (Throughout
this report, change means relative change-the ratio of
the absolute change in the bankruptcy rate to the level of
the Bankruptcy rate in the earlier year.) There is no reason
why a two-year interval centered on the date when the fed-
eral wage garnishment law took effect should not be suffi-
cient. The time periods on either side of July 1, 1970 need
merely be long enough to reduce -to an acceptable level
the risk that random variations in the number of bank-
ruptcy filings might distort the data.
1n
There are methodological problems in the analysis of
the relation between wage garnishment exemptions and
bankruptcy rates. Many state laws express their wage ex-
emptions not as a simple fraction of earnings, but as a
stated number of dollars per week or month. In order to
determine whether the federal law had effectively raised a
state's wage exemption on July 1, 1970, we had to express
the exemption before that date as a fraction of a man's
earnings. We did this by following the same conventions
that had been used in the Brookings study.4 The staff re-
searchers carefully examined the wage garnishment stat-
utes of every state to make sure that we had correct
information before beginning the analysis.
m
Forty-nine states (all except Ohio) and the District of
Columbia were divided into two groups, depending on
whether their wage exemptions from garnishment were
increased or not by federal law on July 1, 1970. The
groups were of almost equal size, twenty-five states and
the District in the first group, and twenty-four states in

*Deputy Director, Commission on Bankruptcy Laws of the
United States
**Research Associate, Economic Studies Program, The Brook-
ings Institution.
1. H.R. Report No. 1040 to accompany H.R. 11601, Con-
sumer Credit Protection Act 20-21 (90th Cong., 1st Sess.,
1967).
2. See, e.g., Brunn, Wage Garnishment in California . 53
Calif.L.Rev. 1214 (1965); Wage Earner Plans Under the
Bankruptcy Act, Hearings before Subcommittee No. 4,
House Committee on the Judiciary on H.R. 1057 and H.R.

5771 107-108 (90th Cong., 1st Session., 1967); D. Stanley
& M. Girth, Bankruptcy: Problem, Process, Reform 28-31,
Appendix B, § 4 at 236 (1971).
3. Strictly speaking, it is the opposite hypothesis that is
tested. The null hypothesis is that the bankruptcy rates in
the two groups of states will have about the same changes.
If the null hypothesis fails the test, our hypothesis is ac-
cepted.
4. D. Stanley & M. Girth, Bankruptcy: Problem, Process, Re-
form 238-241 (1971).

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