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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. Lenders responded to the high filing rate with a major lobbying campaign for bankruptcy reform that led to the adoption in 2005 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made bankruptcy law much less debtor-friendly. The paper first examines why bankruptcy rates increased so sharply. I argue that the main explanation is the rapid growth in credit card debt, which rose from 3.2% of U.S. median family income in 1980 to 12.5% in 2004. The paper then examines how the adoption of BAPCPA changed bankruptcy law. Prior to 2005, bankruptcy law provided debtors with a relatively easy escape route from debt, since credit card debt and other types of debt could be discharged in bankruptcy and even well-off debtors had no obligation to repay. BAPCPA made this escape route less attractive by increasing the costs of filing and forcing some high-income debtors to repay from post-bankruptcy income. However, because many consumers are hyperbolic discounters, making bankruptcy law less debtor-friendly will not solve the problem of consumers borrowing too much. This is because, when less debt is discharged in bankruptcy, lending becomes more profitable and lenders increase the supply of credit. The paper examines the determinants of an optimal bankruptcy law. It also considers the relationship between bankruptcy law and regulation of lending behavior and discusses proposals that would reduce lenders’ incentives to supply too much credit to debtors who are likely to become financially distressed.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13265.

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    Date of creation: Jul 2007
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    Publication status: published as Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    Handle: RePEc:nbr:nberwo:13265

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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. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Accounting for the Rise in Consumer Bankruptcies," NBER Working Papers 13363, National Bureau of Economic Research, Inc.
    3. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 14(2), pages 205-31, October.
    4. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 46(2), pages 543-67, October.
    5. Wang, H.J. & White, M., 1998. "An Optimal Personal Bankruptcy Procedure and Proposed Reform," Papers, Michigan - Center for Research on Economic & Social Theory 98-07, Michigan - Center for Research on Economic & Social Theory.
    6. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
    7. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 50-81, March.
    8. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers, Michigan - Center for Research on Economic & Social Theory 98-03, Michigan - Center for Research on Economic & Social Theory.
    9. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, American Finance Association, vol. 54(1), pages 403-420, 02.
    10. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 217-51, February.
    11. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 42(2), pages 809-30, October.
    12. Kathleen W. Johnson, 2005. "Recent developments in the credit card market and the financial obligations ratio," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Aut, pages 473-486.
    13. Adam B. Ashcraft & Astrid A. Dick & Donald P. Morgan, 2007. "The Bankruptcy Abuse Prevention and Consumer Protection Act: means-testing or mean spirited?," Staff Reports, Federal Reserve Bank of New York 279, Federal Reserve Bank of New York.
    14. 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, Western Economic Association International, vol. 20(4), pages 440-455, October.
    15. 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.
    16. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 706-718, June.
    17. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
    18. 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, University of Chicago Press, vol. 24(2), pages 283-319, June.
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