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The Economic Consequences of Bankruptcy Reform

Author

Listed:
  • Tal Gross
  • Raymond Kluender
  • Feng Liu
  • Matthew J. Notowidigdo
  • Jialan Wang

Abstract

A more generous consumer bankruptcy system provides greater insurance against financial risks, but it may also raise the cost of credit to consumers. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which raised the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs by exploiting variation in the effects of the reform on bankruptcy risk across credit-score segments. Using a combination of administrative records, credit reports, and proprietary market-research data, we find that the reform reduced bankruptcy filings, and reduced the likelihood that an uninsured hospitalization received bankruptcy relief by 70 percent. BAPCPA led to a decrease in credit card interest rates, with an implied pass-through rate of 60–75 percent. Overall, BAPCPA decreased the gap in offered interest rates between prime and subprime consumers by roughly 10 percent.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:26254
    Note: CF LE
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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