The Economic Consequences of Bankruptcy Reform
- (pp. 2309-41)
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.Citation
Gross, Tal, Raymond Kluender, Feng Liu, Matthew J. Notowidigdo, and Jialan Wang. 2021. "The Economic Consequences of Bankruptcy Reform." American Economic Review, 111 (7): 2309-41. DOI: 10.1257/aer.20191311Additional Materials
JEL Classification
- D18 Consumer Protection
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- I13 Health Insurance, Public and Private
- K35 Personal Bankruptcy Law