Determinants of the Consumer Bankruptcy Decision

American Economic Review, 2007

There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one's debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules -while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

Social Science Research Network, 2016

We examine the impact of the 2009 amendments to the Canadian Bankruptcy and Insolvency Act on insolvency decisions. Rule changes steered debtors out of division I proposals and into the more cost-effective division II proposals. This also led to a significant substitution out of bankruptcies and into proposals. Using credit bureau data on credit card limits we test, but do not find, any evidence that this substitution into more creditor-friendly insolvencies had any impact on average lending behavior, either immediately following the amendments or up to six years removed.

1999

Good morning. On behalf of the Fordham Law School Graduate Program, I want to welcome you here for a day-long conference dealing with the subject of consumer bankruptcy. The subject of consumer bankruptcy has achieved high visibility over the last few years. This stems principally from the dramatic increase in the number of consumers who are now choosing the bankruptcy option. Led by consumer-related bankruptcies, the number of bankruptcy filings reached an all-time high in 1996, when consumer bankruptcy filings exceeded the one-million mark for the first time in history.' Projections for 1997 are even higher. 2 In fact, a new record for filings in the second quarter was established this year, when 367,000 bankruptcy cases were filed. This indicates an annual total of close to 1,500,000. 4 This means that the total number of bankruptcy filings in 1997 is now expected to exceed those in 1996 by some 23%. 5 On the other hand, while 1997 is expected to set an all-time record for the number of bankruptcy filings, it may be that the peak growth rate has been reached and passed. It is significant that the rate of creditor charge-offs showed a decline in June and in July. 6 Analyses of the problem-if, indeed, there is a problem-differ. In the second quarter of 1997, commercial banks set an all-time earnings record. The banking system is acknowledged by both the banks themselves and by their regulators to be in excellent financial condition, despite consumer lenders' loss of some $40 billion per year as a result of consumer bankruptcies. 7

The American Economic Review, 2002

Journal of Consumer Studies and Home Economics, 1992

Department of Human Development and Family Data for this study were collected during 1988 through surveys conducted in Canada, Japan, Scotland and the United States. The overall objectives of the study were to determine differences in factors influencing decisions to file bankruptcy, expectations from bankruptcy and impact of bankruptcy filing on debtor's life in each country. It was found that over 50% of debtors in all countries except the United States (46%) identified 'too much borrowing' as a reason for having to file for bankruptcy. Most of the debtors in each country agreed that bankruptcy provided a 'fresh start'. In addition, U.S. and Canadian debtors also indicated that filing for bankruptcy had a positive influence on their health status, family relations and the employment status. The impact of bankruptcy for Japanese debtors was rather harsh, resulting in family problems, health problems, suicides and running away from home. To help reduce the growth in bankruptcy and halt repeat bankruptcies, a multi-level effort focusing on lending practices, borrowing practices and bankruptcy procedures is needed.

SSRN Electronic Journal, 2000

While prior papers have examined the impact of state exemption and garnishment laws on the average household, this paper is the first to examine their heterogeneous impact. In my theoretical model, households choose between three options: repayment, bankruptcy, and informal bankruptcy (non-repayment without the benefit of the formal bankruptcy process). The model makes two predictions about the likelihood that a household will file for bankruptcy. First, the model predicts that high asset households are more likely to file for bankruptcy in states with high exemption levels. Second, the model predicts that households with lower incomes are more likely to file for bankruptcy in states with high garnishment rates. These predictions are confirmed using a new household level dataset. The dataset finds, for example, that households with $225,000 in home equity are 1.7 times more likely to file for bankruptcy in a state with a high exemption level, whereas households earning less than $10,000 per year are 1.6 times more likely to file for bankruptcy in a state with a high garnishment rate. Understanding these cross-state differences is crucial as they suggest that a household with a given set of financial characteristics will seek bankruptcy relief if it resides in one state but will have to use alternative consumption smoothing measures if it lives in a different state.

2012

Bank of Canada working papers are theoretical or empirical works-in-progress on subjects in economics and finance. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada.

This article discusses comparative consumer bankruptcy in the context of the international spread of consumer credit capitalism and its accompanying social cost, overindebtedness. The article outlines the contours of regulation of credit markets and overindebtedness within Europe, the influence of the U.S. idea of the "fresh start" on recent changes in European debt-adjustment laws and continuing contrasts with the U.S. approach to bankruptcy. As consumer debt increases in Europe and elsewhere, these differences between continental European and North American approaches to bankruptcy might be explained by the path-dependence of legal institutions, cultural differences, or the political influence of interest groups. The article is skeptical about cultural explanations of difference and suggests the value of an analysis that is sensitive to political economy and history. It also argues that future comparative research should focus on overindebtedness rather than bankruptcy.

The Quarterly Journal of Economics, 1997

This paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit. While generous state-level bankruptcy exemptions are probably viewed by most policymakers as benefiting less-well-off borrowers, our results using data from the 1983 Survey of Consumer Finances suggest they increase the amount of credit held by high-asset households and reduce the availability and amount of credit to low-asset households, conditioning on observable characteristics. We also find evidence that interest rates on automobile loans for lowasset households are higher in high exemption states. Thus, bankruptcy exemptions redistribute credit toward borrowers with high assets.

This appendix contains supplementary material for Livshits, MacGee, and Tertilt (2009). In particular, it provides further details on some of the data used, it discusses three additional potential stories that turn out to be of little importance, and we provide a robustness exercise concerning the importance of changes in income uncertainty.

Risk Management & Insurance Review, 1999

The purpose of this paper is to extend the risk management paradigm to include the decision by individuals to use the Federal Bankruptcy Act to manage personal financial risks. Broadening risk management to include personal bankruptcy is consistent with the view that risk management is no longer an interdisciplinary discipline that has a singular focus on managing corporate pure risks.

SSRN Electronic Journal, 2003

Whether improving access to credit alleviates financial distress among households is the subject of intense debate. While it can mitigate financial hardship through the possibility of consumption smoothing, credit access may exacerbate distress among certain group of borrowers because of over-borrowing. Using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), I investigate the impact of consumer credit availability on households' borrowing decisions and the subsequent effect on their financial well-being. Exploiting arguably exogenous cross-state variation in the generosity of bankruptcy law (exemption limits) prior to the Act, I find that households' access to credit increased significantly more in states with higher exemption limits, where lenders were more exposed to losses from bankruptcy filings. Households with low education and those with self-reported self-control problems responded aggressively by taking on large amounts of debt and spending it mainly on apparel and recreational activities. Consequently, households' distress, as measured by their inability to repay mortgage loans as well as a significant decline of food consumption, increased substantially more among low educated households and those with self-control problems. The paper highlights the real cost of credit availability for a subgroup of vulnerable borrowers.

Journal of Public Economics, 2011

Anecdotal evidence and several observational studies suggest that out-of-pocket medical costs are pivotal in a large fraction of consumer bankruptcies. In this paper, we assess the contribution of medical costs to household bankruptcy risk by exploiting plausibly exogenous variation in publicly provided health insurance. Using cross-state variation in Medicaid expansions from 1992 through 2004, we find that a 10 percentage point increase in Medicaid eligibility reduces the personal bankruptcy rate by 8.4 percent, with no evidence that business bankruptcies are similarly affected. We interpret our findings with a model in which health insurance imperfectly substitutes for other forms of financial protection. We conclude with simple calibration exercises, which suggest that outof-pocket medical costs are pivotal in roughly 26 percent of personal bankruptcies among low-income households.

American Economic Journal: Macroeconomics, 2010

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.