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The Economic Consequences of Bankruptcy Reform

Author

Listed:
  • Tal Gross
  • Raymond Kluender
  • Feng Liu
  • Matthew J. Notowidigdo
  • Jialan Wang
Abstract
A more generous consumer bankruptcy system provides greater insurance against financial risks but may also raise the cost of credit. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which increased the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs using variation in the effects of the reform across credit scores. We find that a one-percentage-point reduction in bankruptcy filing risk decreased credit card interest rates by 70–90 basis points. Conversely, BAPCPA reduced the insurance value of bankruptcy, with uninsured hospitalizations 70 percent less likely to obtain bankruptcy relief after the reform.

Suggested Citation

  • Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2021. "The Economic Consequences of Bankruptcy Reform," American Economic Review, American Economic Association, vol. 111(7), pages 2309-2341, July.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:7:p:2309-41
    DOI: 10.1257/aer.20191311
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    Cited by:

    1. Brian Jonghwan Lee, 2024. "Bankruptcy Lawyers and Credit Recovery," Working Papers 24-10, Federal Reserve Bank of Philadelphia.
    2. Pattison, Nathaniel & Millimet, Daniel L., 2023. "A Tale of Two Bankruptcies: Geographic Differences in Bankruptcy Chapter Choice," IZA Discussion Papers 16105, Institute of Labor Economics (IZA).
    3. Wang, Jialan & Burke, Kathleen, 2022. "The effects of disclosure and enforcement on payday lending in Texas," Journal of Financial Economics, Elsevier, vol. 145(2), pages 489-507.
    4. Julia Fonseca, 2023. "Less Mainstream Credit, More Payday Borrowing? Evidence from Debt Collection Restrictions," Journal of Finance, American Finance Association, vol. 78(1), pages 63-103, February.
    5. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    6. Sumit Agarwal & Slava Mikhed & Barry Scholnick & Man Zhang, 2022. "Reducing Strategic Default in a Financial Crisis," Working Papers 21-36, Federal Reserve Bank of Philadelphia.
    7. Koudijs, Peter & Salisbury, Laura, 2020. "Limited liability and investment: Evidence from changes in marital property laws in the US South, 1840–1850," Journal of Financial Economics, Elsevier, vol. 138(1), pages 1-26.
    8. Benjamin L. Collier & Daniel A. Hartley & Benjamin J. Keys & Jing Xian Ng, 2024. "Credit When You Need It," NBER Working Papers 32845, National Bureau of Economic Research, Inc.
    9. Christa N. Gibbs & Benedict Guttman-Kenney & Donghoon Lee & Scott Nelson & Wilbert Van der Klaauw & Jialan Wang, 2024. "Consumer Credit Reporting Data," Staff Reports 1114, Federal Reserve Bank of New York.
    10. Lee, Ho-Seok & Lim, Byung Hwa, 2023. "Personal bankruptcy and post-bankruptcy liquidity constraint," Journal of Banking & Finance, Elsevier, vol. 152(C).
    11. Gan, Li & Hernandez, Manuel A. & Zhang, Shuoxun, 2021. "Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States," Economic Modelling, Elsevier, vol. 105(C).
    12. Mikhed, Vyacheslav & Raina, Sahil & Scholnick, Barry & Zhang, Man, 2024. "Debtor income manipulation in consumer credit contracts," Journal of Financial Economics, Elsevier, vol. 157(C).
    13. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    14. Slava Mikhed & Sahil Raina & Barry Scholnick & Man Zhang, 2022. "Debtor Fraud in Consumer Debt Renegotiation," Working Papers 22-35, Federal Reserve Bank of Philadelphia.

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    More about this item

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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