Working Paper: NBER ID: w24934
Authors: Stefania Albanesi; Jaromir Nosal
Abstract: The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) is the most important reform of personal bankruptcy in the United States in recent years. This legislation overhauled eligibility requirements and increased monetary costs of filing for bankruptcy. Using administrative credit file data from a nationally representative panel, we quantify the effects of the reform on bankruptcy, insolvency, and foreclosure, we explore the mechanism generating these responses and examine the consequences for households. We find that the reform caused a 50% permanent drop in Chapter 7 filings, a 25% permanent rise in insolvency, but had no effect on Chapter 13 filings. Exploiting the cross-district variation in filing costs resulting from the reform, we show that these responses are driven by liquidity constraints associated with the higher monetary cost of filing for bankruptcy. We show that insolvency is associated with worse outcomes than bankruptcy, in terms of access to credit and credit scores, suggesting that BAPCPA may have removed an important form of relief for financially distressed borrowers.
Keywords: bankruptcy; insolvency; BAPCPA; consumer protection
JEL Codes: E21; E49; G18; K35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rise in attorney fees (K41) | lower-income households (R20) |
| insolvency (G33) | poorer credit access (G51) |
| insolvency (G33) | lower credit scores (G51) |
| BAPCPA reform (K35) | Chapter 7 filings (G33) |
| BAPCPA reform (K35) | insolvency rates (G33) |
| increased monetary costs associated with filing (K41) | Chapter 7 filings (G33) |
| increased monetary costs associated with filing (K41) | insolvency rates (G33) |
| BAPCPA reform (K35) | Chapter 13 filings (K35) |