The Bankruptcy Abuse Prevention and Consumer Protection Act: Means-Testing or Mean Spirited?

28 Pages Posted: 13 Mar 2007

See all articles by Adam B. Ashcraft

Adam B. Ashcraft

Federal Reserve Bank of New York

Astrid Andrea Dick

Federal Reserve Bank of New York

Donald P. Morgan

Federal Reserve Bank of New York

Date Written: March 2007

Abstract

Thousands of U.S. households filed for bankruptcy just before the bankruptcy law changed in 2005. That rush-to-file was more pronounced, we find, in states with more generous bankruptcy exemptions and lower credit scores. We take that finding as evidence that the new law effectively reduces exemptions, which in turn should reduce the "demand" for bankruptcy and the resulting losses to suppliers of consumer credit. We expect the savings to suppliers will be shared with borrowers by way of lower credit card rates, although credit card spreads have not yet fallen. If cheaper credit is the upside of the new law, the downside is reduced bankruptcy "insurance" against bad luck. The overall impact of the new law on the average household depends on how one weighs those two sides.

Keywords: bankruptcy, consumption smoothing, insurance, moral hazard

JEL Classification: G33, K35

Suggested Citation

Ashcraft, Adam B. and Dick, Astrid Andrea and Morgan, Donald P., The Bankruptcy Abuse Prevention and Consumer Protection Act: Means-Testing or Mean Spirited? (March 2007). FRB of New York Staff Report No. 279. Available at SSRN: https://ssrn.com/abstract=970667 or http://dx.doi.org/10.2139/ssrn.970667

Adam B. Ashcraft

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

Astrid Andrea Dick

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

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