The Economic Consequences of Bankruptcy Reform

42 Pages Posted: 19 Nov 2020

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: July 31, 2020

Abstract

A more generous consumer bankruptcy system provides greater insurance against financial risks but may also raise the cost of credit. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which increased the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs using variation in the effects of the reform across credit scores. We find that a one-percentage-point reduction in bankruptcy-filing risk decreased credit-card interest rates by 70{90 basis points. Conversely, BAPCPA reduced the insurance value of bankruptcy, with uninsured hospitalizations 70 percent less likely to obtain bankruptcy relief after the reform.

Suggested Citation

Gross, Tal and Kluender, Raymond and Liu, Feng and Notowidigdo, Matthew and Wang, Jialan, The Economic Consequences of Bankruptcy Reform (July 31, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-164, Consumer Financial Protection Bureau Office of Research Reports Series No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3733736 or http://dx.doi.org/10.2139/ssrn.3733736

Tal Gross

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

600 West 168th Street, 6th Floor
New York, NY 10032
United States

HOME PAGE: http://www.talgross.com

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 (Contact Author)

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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