Busy Bankruptcy Courts and the Cost of Credit

Abstract

What are the costs of congested court systems? This paper studies the 2005 consumer bankruptcy reform, which caused the largest recorded drop in the caseload of bankruptcy courts in the United States. The reform changed the law for individual debtors but left corporate bankruptcies unaffected. This generates plausibly exogenous variation in firms’ exposure to court backlog across bankruptcy districts. Using a difference-in-differences approach, I find that lower court congestion decreases credit spreads and increases loan maturities. Consistent with a shock to credit supply due to higher expected recovery values, less congested courts increase firm leverage but leave default risk unchanged.

Keywords: bankruptcy, courts, debt enforcement, law and finance

JEL Classification: G21, G32, G33, K22, K42.