Credit Access after Consumer Bankruptcy Filing: New Evidence

This paper uses a unique data set to shed new light on credit availability to consumer bankruptcy filers. In particular, our data allow us to distinguish between Chapter 7 and Chapter 13 bankruptcy filings, to observe changes in credit demand and credit supply explicitly, and to differentiate existing and new credit accounts. The paper has four main findings. First, despite speedy recovery in their risk scores after bankruptcy filing, most filers have much reduced access to credit in terms of credit limits, and the impact seems to be long lasting (well beyond the discharge date). Second, the reduction in credit access stems mainly from the supply side as consumer inquiries recover significantly after the filing, while credit limits remain low. Third, new lenders do not treat Chapter 13 filers more favorably than Chapter 7 filers. In fact, Chapter 13 filers are much less likely to receive new credit cards than Chapter 7 filers even after controlling for borrower characteristics and local economic environment. Finally, we find that Chapter 13 filers overall end up with a slightly larger credit limit amount than Chapter 7 filers (both after the filing and after discharge) because they are able to maintain more of their old credit from before bankruptcy filing. Our results casts doubt on the effectiveness of the current bankruptcy system in providing relief to bankruptcy filers and especially its recent push to get debtors into Chapter 13.