Credit Access and Credit Performance after Consumer Bankruptcy Filing: New Evidence

Abstract

This paper uses a unique data set to shed new light on the credit availability and credit performance of 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 supply explicitly, to differentiate existing and new credit accounts, and to observe the performance of each credit account directly. 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. 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, 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 perform more poorly than Chapter 7 filers (after the filing) on all credit products (credit card debt, auto loans, and first mortgages). Our results, in contrast to prior studies, thus suggest that the current bankruptcy system does not appear to provide much relief to bankruptcy filers.

Keywords: bankruptcy, credit limit, credit performance, financial crisis, bankruptcy reform

JEL Classification: G01, G02, G28, K35