Labor Market Upheaval, Default Regulations, and Consumer Debt

FRB of St. Louis Working Paper No. 2014-002B

41 Pages Posted: 7 Feb 2014 Last revised: 20 Aug 2014

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Xuan S. Tam

City University of Hong Kong

Eric R. Young

University of Virginia

Date Written: August 7, 2014

Abstract

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment. By contrast, informal default through delinquency rose sharply. In the subsequent recovery, households have been widely viewed as "deleveraging" (Mian and Su2011, Krugman and Eggertson 2012) via the largest reduction of unsecured debt seen in the past three decades. We measure the relative roles of recent bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession. Our results suggest that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both.

Keywords: Delinquency, Personal Bankruptcy, Unsecured Debt, Job Separation, Job Finding

JEL Classification: D9, E21, K35

Suggested Citation

Athreya, Kartik and Sanchez, Juan M. and Tam, Xuan S. and Young, Eric R., Labor Market Upheaval, Default Regulations, and Consumer Debt (August 7, 2014). FRB of St. Louis Working Paper No. 2014-002B, Available at SSRN: https://ssrn.com/abstract=2390964 or http://dx.doi.org/10.2139/ssrn.2390964

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Juan M. Sanchez (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Xuan S. Tam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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