The Economic Consequences of Bankruptcy Reform

69 Pages Posted: 18 Sep 2019

See all articles by Tal Gross

Tal Gross

Columbia University - Department of Health Policy and Management

Raymond Kluender

Harvard University - Business School (HBS)

Feng Liu

Consumer Financial Protection Bureau

Matthew Notowidigdo

University of Chicago - Booth School of Business

Jialan Wang

University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

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.

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Suggested Citation

Gross, Tal and Kluender, Raymond and Liu, Feng and Notowidigdo, Matthew and Wang, Jialan, The Economic Consequences of Bankruptcy Reform (September 2019). NBER Working Paper No. w26254, Available at SSRN: https://ssrn.com/abstract=3454355

Tal Gross (Contact Author)

Columbia University - Department of Health Policy and Management ( email )

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Raymond Kluender

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Feng Liu

Consumer Financial Protection Bureau ( email )

United States

Matthew Notowidigdo

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Jialan Wang

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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