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The Economic Consequences of Bankruptcy Reform

Author

Listed:
  • Tal Gross

    (Boston University;NBER)

  • Raymond Kluender

    (Harvard University - Harvard Business School)

  • Feng Liu

    (Consumer Financial Protection Bureau)

  • Matthew J. Notowidigdo

    (University of Chicago - Booth School of Business; NBER)

  • Jialan Wang

    (University of Illinois at Urbana-Champaign)

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, 2020. "The Economic Consequences of Bankruptcy Reform," Working Papers 2020-164, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2020-164
    as

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    References listed on IDEAS

    as
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