IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Bankruptcy Reform and Credit Cards

  • Michelle J. White
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.nber.org/papers/w13265.pdf
    Download Restriction: no

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

    as
    in new window

    Length:
    Date of creation: Jul 2007
    Date of revision:
    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
    Note: LE CF AP
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
    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. 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 809-30, October.
    4. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02.
    5. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
    6. 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.), issue Aut, pages 473-486.
    7. 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 279, Federal Reserve Bank of New York.
    8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
    9. Wang, Hung-Jen & White, Michelle J, 2000. "An Optimal Personal Bankruptcy Procedure and Proposed Reforms," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 255-86, January.
    10. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    11. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
    12. David B. Gross & Nicholas S. Souleles, 2001. "An Empirical Analysis of Personal Bankruptcy and Delinquency," NBER Working Papers 8409, National Bureau of Economic Research, Inc.
    13. 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, vol. 20(4), pages 440-455, October.
    14. 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.
    15. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    16. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    17. 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, vol. 24(2), pages 283-319, June.
    18. 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.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13265. 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: ()

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.