Abstract:  
What is the relationship between disability programs and financial distress? We provide the first evidence on this relationship using several markers of financial distress: bankruptcy, foreclosure, eviction, and home sale. Rates of these adverse financial events peak around the time of disability application. Using variation induced by an age-based eligibility rule, we find that disability allowance reduces the likelihood of bankruptcy by 20 percent, foreclosure by 33 percent, and home sale by 15 percent. We present evidence that these changes reflect true reductions in financial distress. Considering these extreme events increases the optimal disability benefit amount and suggests a shorter optimal waiting time between application and benefit receipt. 

Commentary by Ed Boltz:
This research is an interesting use of bankruptcy, which the authors describe as the “most reliable” of its datasets, to evaluate other policies, here Social Security disability. This is also likely true as people that file bankruptcy are also “canaries in the coal mine” and representative of others who are nearly as financially distressed.

These findings reinforce that bankruptcy is often a “last resort,” used after exhausting other income supports. If disability benefits are granted more promptly, some debtors may be able to resolve or manage their financial issues without ever needing to invoke the bankruptcy system. Further research taking a longer range view of how receiving SSDI impacts bankruptcy rates would also be useful.

Lastly, this also supports the decisions made by many law firms to focus not only on bankruptcy representation, but on assisting people with Social Security disability appeals, as there is a clear synergy between those areas of the law. Other consumer bankruptcy attorneys, even if not diversifying their own practices, might benefit from affiliating with disability law firms for mutual referrals. The Study is available from American Economic Journal: Applied Economics and be accessed by clicking here: Disability and Distress: The Effect of Disability Programs on Financial Outcomes