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American Economic Review Vol. 111 No. 7 2021

The Economic Consequences of Bankruptcy Reform

Tal Gross1; Raymond Kluender2; Feng Liu3; Matthew Notowidigdo4; Jialan Wang5

1 Questrom School of Business, Boston University (email: ) · 2 Harvard Business School, Harvard University (email: ) · 3 Consumer Financial Protection Bureau (email: ) · 4 Booth School of Business, University of Chicago (email: ) · 5 Gies College of Business, University of Illinois at Urbana-Champaign (email: )

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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.

DOI
10.1257/aer.20191311
Volume
111
Issue
7
Pages
2309-2341
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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