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The Economic Consequences of Bankruptcy Reform

Tal Gross (), Raymond Kluender (), Feng Liu (), Matthew Notowidigdo () and Jialan Wang ()
Additional contact information
Tal Gross: Boston University;NBER
Raymond Kluender: Harvard University - Harvard Business School
Feng Liu: Consumer Financial Protection Bureau
Matthew Notowidigdo: University of Chicago - Booth School of Business; NBER
Jialan Wang: University of Illinois at Urbana-Champaign

No 2020-164, Working Papers from Becker Friedman Institute for Research In Economics

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.

Pages: 40 pages
Date: 2020
New Economics Papers: this item is included in nep-ban and nep-rmg
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https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_2020164.pdf (application/pdf)

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