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Insolvency After the 2005 Bankruptcy Reform

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  • Albanesi, Stefania
  • Nosal, Jaromir

Abstract

Using a comprehensive panel data set on U.S. households, we study the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the most substantive reform of personal bankruptcy in the United States since the Bankruptcy Reform Act of 1978. The 2005 legislation introduced a means test based on income to establish eligibility for Chapter 7 bankruptcy and increased the administrative requirements to file, leading to a rise in the opportunity cost and, especially, the financial cost of filing for bankruptcy. We study the effects of the reform on bankruptcy, insolvency, and foreclosure. We find that the reform caused a permanent drop in the Chapter 7 bankruptcy rate relative to pre-reform levels, due to the rise in filing costs associated with the reform, which can be interpreted as resulting from liquidity constraints. We find that the decline in bankruptcy filings resulted in a rise in the rate and persistence of insolvency as well as an increase in the rate of foreclosure. We find no evidence of a link between the decline in bankruptcy and a rise in the number of individuals who are current on their debt. We document that these effects are concentrated at the bottom of the income distribution, suggesting that the income means tests introduced by BAPCPA did not serve as an effective screening device. We show that insolvency is associated with worse financial outcomes than bankruptcy, as insolvent individuals have less access to new lines of credit and display lower credit scores than individuals who file for bankruptcy. Since bankruptcy filings declined much more for low income individuals, our findings suggest that BAPCPA may have removed an important form of relief from financial distress for this group.

Suggested Citation

  • Albanesi, Stefania & Nosal, Jaromir, 2015. "Insolvency After the 2005 Bankruptcy Reform," CEPR Discussion Papers 10533, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10533
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    1. Hülya Eraslan & Gizem Koşar & Wenli Li & Pierre‐Daniel Sarte, 2017. "An Anatomy Of U.S. Personal Bankruptcy Under Chapter 13," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 671-702, August.
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    8. Borys Grochulski, 2010. "Optimal Personal Bankruptcy Design under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 350-378, April.
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    Cited by:

    1. Rajeev Darolia & Dubravka Ritter, 2020. "Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform," Education Finance and Policy, MIT Press, vol. 15(3), pages 487-517, Summer.
    2. Satyajit c & Dean Corbae & Kyle Dempsey & Jose-Victor Rios-Rull, 2020. "A Quantitative Theory of the Credit Score," PIER Working Paper Archive 20-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Kyle Herkenhoff, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," 2016 Meeting Papers 781, Society for Economic Dynamics.
    4. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    5. Gordon Phillips & Kyle Herkenhoff, 2015. "The Impact of Consumer Credit Constraints on Earnings, Sorting, and Job Finding Rates of Displaced Workers," 2015 Meeting Papers 375, Society for Economic Dynamics.
    6. Stefania Albanesi & Jaromir Nosal, 2016. "Personal Bankruptcy in the US: Effects of the 2005 Reform," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(04), pages 08-14, February.
    7. Lara Wemans & Manuel Coutinho Pereira, 2022. "Characteristics of parties and duration of insolvency cases in Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    8. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    9. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    10. António R. Antunes & Tiago Cavalcanti & Caterina Mendicino & Marcel Peruffo & Anne Villamil, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.
    11. 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.
    12. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    13. repec:ces:ifodic:v:13:y:2016:i:4:p:19191575 is not listed on IDEAS
    14. Bleemer, Zachary & van der Klaauw, Wilbert, 2019. "Long-run net distributionary effects of federal disaster insurance: The case of Hurricane Katrina," Journal of Urban Economics, Elsevier, vol. 110(C), pages 70-88.
    15. Wenli Li & Costas Meghir & Florian Oswald, 2022. "Consumer Bankruptcy, Mortgage Default and Labor Supply," Cowles Foundation Discussion Papers 2327, Cowles Foundation for Research in Economics, Yale University.
    16. Robert Dinterman & Ani L. Katchova, 2021. "Survival analysis of farm bankruptcy filings: Evaluating the time to completion of chapter 12 bankruptcy cases," Agribusiness, John Wiley & Sons, Ltd., vol. 37(2), pages 324-347, April.
    17. Stefania Albanesi & Jaromir Nosal, 2016. "Personal Bankruptcy in the US: Effects of the 2005 Reform," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 08-14, 02.

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    More about this item

    Keywords

    foreclosure; insolvency; personal bankruptcy;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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