Pretrial detention increases rate of household insolvency, U of A study finds

People who get arrested but cannot afford bail create significant financial difficulties for their families, which leads to higher rates of household insolvency, says a new study co-authored by a University of Alberta finance professor.

Those insolvencies are driven by personal bankruptcies, judgment liens (against personal or real property), and more mortgage foreclosures when house prices drop.

The research by Sheng-Jun Xu of the Alberta School of Business and Pablo Slutzky of the University of Maryland, is from the study The Financial Consequences of Pretrial Detention, published in The Review of Financial Studies.

It shows that the probability of personal bankruptcy increases by 30 per cent over the average, within three years of pretrial custody.

Pretrial detention also increases the likelihood of creditors, such as bail bondsmen, making lawful claims on debtors’ property when they fall behind on their payments. The likelihood of those judgment liens increases by 35 per cent over the average, within three years following arrest.

Overall, when bankruptcies, judgment liens and foreclosures were measured together, the probability of household insolvency increases by 16 per cent.

However, the research also found that households with equity in their homes have a cushion against insolvency because they can pledge their home as collateral rather than using cash or borrowing from bail bondsmen. But this option is less likely to be available when house prices (and equity) fall in value.

Financial woe spills over to a defendant’s family members because it is most often relatives who post bail for the defendant or act as a guarantor on the defendant’s bail bond.

“We find the effect on the focal defendant is small and statistically insignificant—consistent with their likely low incomes and limited assets,” the study says. 

The study also found evidence suggesting that financing bail with commercial bail bonds contributes to a higher probability of household insolvency because of the high fees and the strict repayment conditions imposed by those commercial bail bondsmen.

“The biggest takeaway is about the unintended financial costs that pretrial detention imposes on households,” said Xu. “This particularly applies to how the costs spill over to defendants’ family members, which is unlikely to be factored into the decision-making process in the criminal justice system.”

The researchers suggest that judges should consider that holding defendants on bail may impose financial costs for their family members. 

“However, the current system in many jurisdictions requires bail judges to make quick decisions on large caseloads, and such careful considerations may not always be realistic,” said Xu. 

The study’s findings are also notable because they support research elsewhere that suggests that the U.S. criminal justice system’s fines and fees can trap people in a cycle of poverty.

For their study, the researchers merged information from more than a million criminal cases in the state of Maryland from 2000 to 2016 with data on consumer bankruptcy, foreclosures and judgment liens. They then used defendants’ addresses to study the impact on both defendants and their households.

Read this paper’s abstract at doi:10.1093/rfs/abcd123 

Sheng-Jun Xu’s research interests include corporate finance, labor economics and political economy