Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors

Abstract:     
Just three years ago, Congress enacted controversial amendments to the Bankruptcy Code. The proponents claimed that the changes would drive the "can pay" debtors (of which there were supposedly many) from the bankruptcy courts with tough new income-based eligibility requirements. And indeed, after the enactment of the amendments, the number of people filing for bankruptcy plunged. In this Article - the initial report of the 2007 Consumer Bankruptcy Project - the authors analyze the first national, random sample of post-amendments bankruptcy filers. Contrary to the advocates' claim that high-income filers would be driven from the system and, by implication, that those remaining would have more modest incomes, the data show no change in the income levels of bankruptcy filers after the amendments. These findings thus cast doubt on the suggestion that those purged from the bankruptcy courts - approximately 800,000 in 2007 alone based on trend extrapolation - were high-income deadbeats; they instead appear to have been ordinary American families in serious financial distress. The data also show that debtors filing for bankruptcy in 2007 have even greater debt loads than their counterparts from 2001, a development that seems to track a national trend of increasing consumer debt. The findings thus align with at least two predictions of some legal scholars. The first is that the bankruptcy reform bill was not aimed at high-income abusers but was instead a general assault on all debtors, regardless of their financial circumstances. The second is that debtors are waiting longer - and incurring more debt - before ultimately seeking bankruptcy relief, consistent with the so-called "sweat box" theory of credit card lending.

Keywords: 2007 Consumer Bankruptcy Project, bankruptcy reform, consumer debtors, credit risk, predatory lending

JEL Classifications: A10, D10, D18

Accepted Paper Series