IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/797.html
   My bibliography  Save this paper

Auto credit and the 2005 bankruptcy reform: the impact of eliminating cramdowns

Author

Listed:
  • Rajashri Chakrabarti
  • Nathaniel Pattison

Abstract

Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform. Cars depreciate quickly, so borrowers often owe more than their car is worth. Prior to the Reform, these borrowers could reduce the principal on their auto loan to the market value of the car through a ?cramdown? in Chapter 13 bankruptcy. The Reform prohibited cramdowns during the first two and a half years of an auto loan. This paper is the first to estimate the causal effect of this anticramdown provision on the price and quantity of auto credit. The authors use a novel empirical strategy that relies on the fact that eliminating cramdowns affected only one of the two types of consumer bankruptcy: Chapter 13. They exploit persistent historical variation in states? usage of Chapter 13 generated by differences in local legal culture. Using difference-in-differences regressions, their empirical strategy compares pre-Reform and post-Reform auto loans across states with persistent historical differences in the share of bankruptcies filed under Chapter 13. They find that eliminating cramdowns decreased interest rates on auto loans in the average state by 15 basis points, with a larger decline in states where Chapter 13 is more common. The decline in interest rates occurs in the exact month that the Reform went into effect, and the authors rule out other aspects of the Reform as possible causes. Next, the authors estimate the effect on the quantity of auto credit. Using quarterly data from the FRBNY Consumer Credit Panel based on Equifax credit reports, they examine the effect of eliminating cramdowns on the number and size of new auto loans. The estimates show a small, negative, and insignificant impact on the number of new auto loans. The authors do find some evidence, however, that loan sizes increased among subprime borrowers.

Suggested Citation

  • Rajashri Chakrabarti & Nathaniel Pattison, 2016. "Auto credit and the 2005 bankruptcy reform: the impact of eliminating cramdowns," Staff Reports 797, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:797
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr797.pdf?la=en
    File Function: Full text
    Download Restriction: no

    File URL: https://www.newyorkfed.org/research/staff_reports/sr797.html
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Céline CARRERE & Jaime MELO DE, 2009. "Non-Tariff Measures: What do we Know, What Should be Done?," Working Papers 200933, CERDI.
    2. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 217-251.
    3. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    4. Berger, Allen N. & Cerqueiro, Geraldo & Penas, María F., 2011. "Does debtor protection really protect debtors? Evidence from the small business credit market," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1843-1857, July.
    5. Joshua Goodman & Adam Levitin, 2014. "Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates," Journal of Law and Economics, University of Chicago Press, vol. 57(1), pages 139-158.
    6. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?," NBER Working Papers 19952, National Bureau of Economic Research, Inc.
    7. Astrid A. Dick & Andreas Lehnert, 2010. "Personal Bankruptcy and Credit Market Competition," Journal of Finance, American Finance Association, vol. 65(2), pages 655-686, April.
    8. 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 809-830, October.
    9. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
    10. Frank McIntyre & Daniel M. Sullivan & Laura Summers, 2015. "Lawyers Steer Clients Toward Lucrative Filings: Evidence from Consumer Bankruptcies," American Law and Economics Review, Oxford University Press, vol. 17(1), pages 245-289.
    11. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    12. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
    13. 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.
    14. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, February.
    15. Rajeev Darolia & Dubravka Ritter, 2015. "Do student loan borrowers opportunistically default? Evidence from bankruptcy reform," Working Papers 15-17, Federal Reserve Bank of Philadelphia.
    16. Cornwell, Christopher & Xu, Bing, 2014. "Effects of the BAPCPA on the chapter composition of consumer bankruptcies," Economics Letters, Elsevier, vol. 124(3), pages 439-442.
    17. Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2019. "The Economic Consequences of Bankruptcy Reform," NBER Working Papers 26254, National Bureau of Economic Research, Inc.
    2. 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.
    3. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using bankruptcy to reduce foreclosures: does strip-down of mortgages affect the supply of mortgage credit?," Working Papers 14-35, Federal Reserve Bank of Philadelphia.
    3. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    4. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    5. 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, pages 671-702, August.
    6. Benjamin B Boozer & S. Keith Lowe & Robert J. Landry III, 2014. "Personal Financial Decisions: A Study of Changes in Homestead Exemption Levels and Consumer Bankruptcy Choices," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(4), pages 17-26.
    7. Charles Grant, 2021. "The Evolution of Arrears among US Households 1995–2013," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 14(2), pages 1-40, January.
    8. Fedaseyeu, Viktar, 2020. "Debt collection agencies and the supply of consumer credit," Journal of Financial Economics, Elsevier, vol. 138(1), pages 193-221.
    9. Garrett, Thomas A. & Wall, Howard J., 2014. "Personal-Bankruptcy Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1488-1507, October.
    10. Aloisio Araujo & Bruno Funchal, 2015. "How Much Should Debtors be Punished in Case of Default?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 229-245, April.
    11. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    12. Corradin, Stefano & Gropp, Reint & Huizinga, Harry & Laeven, Luc, 2016. "The effect of personal bankruptcy exemptions on investment in home equity," Journal of Financial Intermediation, Elsevier, vol. 25(C), pages 77-98.
    13. Wenli Li & Ishani Tewari & Michelle J. White, 2019. "Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 59-87, February.
    14. Dawsey, Amanda E., 2015. "State bankruptcy laws and the responsiveness of credit card demand," Journal of Economics and Business, Elsevier, vol. 81(C), pages 54-76.
    15. Corradin, S. & Gropp, R. & Huizinga, H.P. & Laeven, L., 2010. "Who Invests in Home Equity to Exempt Wealth from Bankruptcy?," Discussion Paper 2010-118, Tilburg University, Center for Economic Research.
    16. Nadia Greenhalgh-Stanley & Shawn Rohlin, 2013. "How Does Bankruptcy Law Impact the Elderly's Business and Housing Decisions?," Journal of Law and Economics, University of Chicago Press, vol. 56(2), pages 417-451.
    17. Joshua Goodman & Adam Levitin, 2014. "Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates," Journal of Law and Economics, University of Chicago Press, vol. 57(1), pages 139-158.
    18. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
    19. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
    20. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.

    More about this item

    Keywords

    consumer credit; BAPCPA; auto loans; cramdown; bankruptcy;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:797. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.