Know Someone Who Won the Lottery? Study Shows This Increases Your Odds of Bankruptcy

New study shows lottery winners can cause money problems for neighbors

Image Source: Flickr User Mystery People

A recent study by the Federal Reserve Bank considers the interesting point of how winning the lottery can impact the lives of those close to the lottery winner. There have been studies on the financial impact and likelihood of bankruptcy for the winners themselves, but never on those adjacent to them. Check out the interesting results of this recent study and how it could relate to your own finances.

Study: “Does Inequality Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies”

The Federal Reserve study was done on Canadian lottery winners, but the application should be universal. The research looked at small neighborhoods with approximately 13 households on average and considered lottery winners who received between $1000 and $150k Canadian dollars.

The study found that a prize of $1000 Canadian ($790 US) caused an increase of 2.4% in the bankruptcy filing rate of the winner's close neighbors and determined that not only did a lottery win increase the chances of a bankruptcy filing by a close neighbor, but the greater the win, the greater the increase in bankruptcy filings. 

The bankruptcy trigger identified in the study was "conspicuous consumption," which means observable spending such as a new car, home renovations or upgrades, and other obvious signs. Bankruptcy filers spent even when they could not afford to spend, and the study indicates their spending was due to dissatisfaction with neighborhood income inequality.

What Is Income Inequality and How Does It Impact Personal Spending?

Simply put, income inequality is when one person earns or has more money than another. In a neighborhood setting, you might assume that most people earn close to the same wage because home values are similar and a certain income level is required to purchase a home in that neighborhood. But when one household benefits from a windfall such as a lottery win, income inequality can instantly come into play.

There’s a mentality of “keeping up with the Joneses” that you might have observed, in which people desire a lifestyle equivalent to those close to them. When lottery winners increase their spending, it can encourage those around them to increase their spending as well, even though they may have to take on an unhealthy amount of debt to do so.

The assumption in this study – which seems apt – is that income inequality causes displeasure. If you see your neighbor has won the lottery and purchased a new vehicle, you will also want a new vehicle. The study showed that consumers who filed bankruptcy after a neighbor won the lottery had in fact increased spending on their vehicles and on their homes.

Do You Spend Because Others Do? It’s a Bad Habit

The “keeping up with the Joneses” mentality is dangerous for your finances. Your spending should not be determined by the spending of others, but it can be difficult to resist the temptation. When you see your neighbor driving a new car, you may be tempted to purchase one as well. You may assume they have better finances but – except in the case of lottery winners – they may be debt-spending to excess.

The fact of the matter is, you don’t know what the true financial status is of any of your neighbors unless they sit down and show you their paystubs, checkbook, and credit card statements. In fact, your finances might be more stable than those of your neighbor who is constantly spending. And, at the end of the day, your finances are your own. No one else should influence your spending and debt accumulation.

If you do end up in debt – like the neighbors of the lottery winners in the Canadian study – bankruptcy may be a viable solution depending on your income, assets, and debt. To find out more about the benefits of North Carolina bankruptcy, contact the Law Offices of John T. Orcutt.

Call +1-833-627-0115 now for a free consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro or Wilmington. Don’t deal with debt collector harassment or living paycheck to paycheck – call us to find out about getting the financial fresh start you deserve.