Consumer default after the 2005 bankruptcy reform

Stefania Albanesi and Jaromir Nosal

The Journal of Law, Economics, and Organization, 2026, vol. 42, issue 1, 221-246

Abstract: The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act is the most important reform of US personal bankruptcy legislation in recent years. It increased the monetary costs of both Chapter 7 and Chapter 13 bankruptcy, while leaving benefits mostly unchanged. Using administrative credit bureau data from a nationally representative panel, we quantify the effects of the rise in filing costs by exploiting its geographical variation. We show the increase in filing costs reduced Chapter 7 bankruptcy rates by 15% for newly financially distressed borrowers, but had no statistically significant effect on Chapter 13. We argue this differential response is consistent with binding liquidity constraints. Additionally, we find that the missing Chapter 7 bankruptcies lead to increased rate of long term financial distress but also a limited rise in rate of returning to being current, while we find no evidence of substitution from Chapter 7 to Chapter 13 filing or foreclosure.

Date: 2026
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