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Bankruptcy Reform and Credit Cards

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  • Michelle J. White
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    Abstract

    From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. By 2004, more Americans were filing for bankruptcy each year than were graduating from college, getting divorced, or being diagnosed with cancer. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law. It made bankruptcy law much less debtor-friendly. Personal bankruptcy filings fell to 600,000 in 2006. This paper explores why personal bankruptcy rates rose, and will argue that the main reason is the growth of "revolving debt" -- mainly credit card debt. It explains how the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 altered the conditions of bankruptcy. Finally, this essay considers the balances that need to be struck in a bankruptcy system and how the U.S. bankruptcy system strikes these balances in comparison with other countries. I argue that a less debtor-friendly bankruptcy policy should be accompanied by changes in bank regulation and truth-in-lending rules, so that lenders have a greater chance of facing losses when they supply too much credit or charge excessively high interest rates and fees.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.21.4.175
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 21 (2007)
    Issue (Month): 4 (Fall)
    Pages: 175-200

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    Handle: RePEc:aea:jecper:v:21:y:2007:i:4:p:175-200

    Note: DOI: 10.1257/jep.21.4.175
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    References

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    1. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
    2. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    3. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
    4. Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
    5. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
    6. Posner, Eric A, 1995. "Contract Law in the Welfare State: A Defense of the Unconscionablility Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 283-319, June.
    7. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
    8. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
    9. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02.
    10. Wang, H.J. & White, M., 1998. "An Optimal Personal Bankruptcy Procedure and Proposed Reform," Papers 98-07, Michigan - Center for Research on Economic & Social Theory.
    11. John M. Barron & Michael E. Staten & Stephanie M. Wilshusen, 2002. "The Impact Of Casino Gambling On Personal Bankruptcy Filing Rates," Contemporary Economic Policy, Western Economic Association International, vol. 20(4), pages 440-455, October.
    12. David B. Gross & Nicholas S. Souleles, 1999. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Center for Financial Institutions Working Papers 98-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-30, October.
    14. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
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    Citations

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    Cited by:
    1. Garrett, Thomas A. & Wall, Howard J., 2010. "Personal-bankruptcy cycles," MPRA Paper 42740, University Library of Munich, Germany.
    2. Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
    3. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
    4. Robert Scott, 2010. "Credit Card Ownership Among American High School Seniors: 1997–2008," Journal of Family and Economic Issues, Springer, vol. 31(2), pages 151-160, June.
    5. Charles Sprenger & Joanna Stavins, 2008. "Credit card debt and payment use," Working Papers 08-2, Federal Reserve Bank of Boston.
    6. Ciliberto, Federico & Schenone, Carola, 2012. "Bankruptcy and product-market competition: Evidence from the airline industry," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 564-577.
    7. Song Han & Geng Li, 2009. "Household borrowing after personal bankruptcy," Finance and Economics Discussion Series 2009-17, Board of Governors of the Federal Reserve System (U.S.).
    8. Ethan Cohen-Cole, 2009. "The option value of consumer bankruptcy," Risk and Policy Analysis Unit Working Paper QAU09-1, Federal Reserve Bank of Boston.
    9. Michelle White & Wenli Li, 2011. "Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence," 2011 Meeting Papers 1038, Society for Economic Dynamics.
    10. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
    12. Leora Klapper, 2011. "Saving Viable Businesses : The Effect of Insolvency Reform," World Bank Other Operational Studies 11056, The World Bank.
    13. Borys Grochulski, 2008. "Optimal personal bankruptcy design : A Mirrlees approach," Working Paper 08-05, Federal Reserve Bank of Richmond.
    14. Paul Cavelaars & Joost Passenier, 2012. "Follow the money: what does the literature on banking tell prudential supervisors on bank business models?," DNB Working Papers 336, Netherlands Central Bank, Research Department.
    15. Lukasz A. Drozd & Ricardo Serrano-Padial, 2013. "Modeling the credit card revolution: the role of debt collection and informal bankruptcy," Working Papers 13-12, Federal Reserve Bank of Philadelphia.
    16. Ethan Cohen-Cole & Burcu Duygan-Bump, 2008. "Household bankruptcy decision: the role of social stigma vs. information sharing," Risk and Policy Analysis Unit Working Paper QAU08-6, Federal Reserve Bank of Boston.

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