A Study of Consumers' Post-Discharge Finances: Struggle, Stasis, or Fresh-Start? (original) (raw)

Consumer Bankruptcy: A Fresh Start

American Economic Review, 2007

There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one's debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules -while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

Credit Access After Consumer Bankruptcy Filing: New Evidence

This article analyzes a unique data set to shed new light on credit availability to debtors who filed for consumer bankruptcy. In particular, our data set allows us to distinguish between Chapter 7 and Chapter 13 debtors, to observe changes in credit demand and credit supply, and to differentiate between existing and new credit accounts. The paper has four main findings. First, despite speedy recoveries in their credit scores after bankruptcy filings, most debtors have reduced access to credit after filing for bankruptcy including reduced limits. The impact seems to be long lasting—well beyond the discharge date. Second, the reduction in credit access stems mainly from the supply side because credit demand by consumers recovers significantly after the filing, whereas credit supply by lenders remains low. Third, new lenders do not treat debtors who filed for Chapter 13 bankruptcy more favorably than debtors who filed for Chapter 7. In fact, debtors who filed for Chapter 13 are much less likely to receive new credit cards than debtors who filed for Chapter 7. Finally, we find that debtors who filed for Chapter 13 receive, on average, a slightly larger credit limit than debtors who filed for Chapter 7 bankruptcy (both after the filing and after discharge) because they are able to maintain more of their old credit that existed before bankruptcy. Our results suggest that although debtors receive a fresh start through bankruptcy (in the form of dischargeable debt), the fresh start they obtain does not necessarily guarantee new credit for them.

On the Rationale for Repeated U.S. Consumer Bankruptcy Filings

Global Business & Economics Anthology, 2020

A theoretical model of U.S. consumer behavior is developed which allows the consumer to file for bankruptcy protection at different points, and on multiple occasions, over her lifespan. The model allows for conspicuous consumption, hyperbolic discounting, and random budget shocks. Findings suggest that individuals who file for bankruptcy protection multiple times may be better or worse off than those who file only once. However, repeat filers present with much more skewed consumption patterns, and evidence of much higher overspending at the time of filing, than individuals who have never filed for bankruptcy or who file for the first time. Keywords: consumer bankruptcy, financial epidemiology, conspicuous consumption

Personal Bankruptcy Decisions Before and After Bankruptcy Reform

2012

We examine the personal bankruptcy decisions of lower-income homeowners before and after the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Econometric studies suggest that personal bankruptcy is explained by financial gain rather than adverse events, but data constraints have hindered tests of the adverse events hypothesis. Using household level panel data and controlling for the financial benefit of filing, we find that stressors related to cash flow, unexpected expenses, unemployment, health insurance coverage, medical bills, and mortgage delinquencies predict bankruptcy filings a year later. At the federal level, BAPCPA explains a decrease in filings over time in counties that experienced lower filing rates. Bankruptcy Determinants 2003-09 P a g e | 1 Personal Bankruptcy Decisions of Lower-Income Homeowners Personal bankruptcy filings increased five-fold from 1980 through October 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (B...

Personal Bankruptcy Reform, Credit Availability, and Financial Distress

SSRN Electronic Journal, 2003

Whether improving access to credit alleviates financial distress among households is the subject of intense debate. While it can mitigate financial hardship through the possibility of consumption smoothing, credit access may exacerbate distress among certain group of borrowers because of over-borrowing. Using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), I investigate the impact of consumer credit availability on households' borrowing decisions and the subsequent effect on their financial well-being. Exploiting arguably exogenous cross-state variation in the generosity of bankruptcy law (exemption limits) prior to the Act, I find that households' access to credit increased significantly more in states with higher exemption limits, where lenders were more exposed to losses from bankruptcy filings. Households with low education and those with self-reported self-control problems responded aggressively by taking on large amounts of debt and spending it mainly on apparel and recreational activities. Consequently, households' distress, as measured by their inability to repay mortgage loans as well as a significant decline of food consumption, increased substantially more among low educated households and those with self-control problems. The paper highlights the real cost of credit availability for a subgroup of vulnerable borrowers.

Personal bankruptcy: theory and evidence

Economic Review, 1982

After the new bankruptcy code became effective October 1, 1979, the number of personal bankruptcy filings (PBFs) in the United States sharply increased to record highs. Some analysts believe that the new code is primarily , responsible for this increase, To evaluate this belief, KJ. Kowalewski examines the theoretical factors behind a consumer's decision to file for bankruptcy; in the aggregate these factors are broadly consistent with the behavior of PBFs in the past 20 years. Using these theoretical factors, , he develops a regression model to explain PBFs and to eval-'uate the impact of the new code. He finds that the new code may have had a smaller impact on PBFs than .previous studies have reported.

Accounting for the Rise in Consumer Bankruptcies

American Economic Journal: Macroeconomics, 2010

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

Comparative Consumer Bankruptcy

This article discusses comparative consumer bankruptcy in the context of the international spread of consumer credit capitalism and its accompanying social cost, overindebtedness. The article outlines the contours of regulation of credit markets and overindebtedness within Europe, the influence of the U.S. idea of the "fresh start" on recent changes in European debt-adjustment laws and continuing contrasts with the U.S. approach to bankruptcy. As consumer debt increases in Europe and elsewhere, these differences between continental European and North American approaches to bankruptcy might be explained by the path-dependence of legal institutions, cultural differences, or the political influence of interest groups. The article is skeptical about cultural explanations of difference and suggests the value of an analysis that is sensitive to political economy and history. It also argues that future comparative research should focus on overindebtedness rather than bankruptcy.

U.S. consumer bankruptcy choice: The importance of general equilibrium effects

Journal of Monetary Economics, 2006

We study the implications of U.S. personal bankruptcy rules for resource allocation and welfare. Our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform. Contrary to previous work, we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input. Furthermore, subjecting Chapter 7 filers to means testing, as suggested by recent legislative proposals, would not improve upon current bankruptcy provisions and, at best, leave aggregate filings, output, and welfare unchanged. However, we do find that an alternative tightening of Chapter 7, in the form of lower asset exemptions, can increase economic efficiency. r