Insolvency After the 2005 Bankruptcy Reform

Abstract

Using a comprehensive panel data set on U.S. households, we study the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the most substantive reform of personal bankruptcy in the United States since the Bankruptcy Reform Act of 1978. The 2005 legislation introduced a means test based on income to establish eligibility for Chapter 7 bankruptcy and increased the administrative requirements to file, leading to a rise in the opportunity cost and, especially, the financial cost of filing for bankruptcy. We study the effects of the reform on bankruptcy, insolvency, and foreclosure. We find that the reform caused a permanent drop in the Chapter 7 bankruptcy rate relative to pre-reform levels, due to the rise in filing costs associated with the reform, which can be interpreted as resulting from liquidity constraints. We find that the decline in bankruptcy filings resulted in a rise in the rate and persistence of insolvency as well as an increase in the rate of foreclosure. We find no evidence of a link between the decline in bankruptcy and a rise in the number of individuals who are current on their debt. We document that these effects are concentrated at the bottom of the income distribution, suggesting that the income means tests introduced by BAPCPA did not serve as an effective screening device. We show that insolvency is associated with worse financial outcomes than bankruptcy, as insolvent individuals have less access to new lines of credit and display lower credit scores than individuals who file for bankruptcy. Since bankruptcy filings declined much more for low-income individuals, our findings suggest that, for this group, BAPCPA may have removed an important form of relief from financial distress.

Survival analysis of farm bankruptcy filings: Evaluating the time to completion of chapter 12 bankruptcy cases

“…While the stated intention of BAPCPA was to limit abuse of consumer bankruptcies, most businesses also felt the pressure of more strict requirements for the filing of bankruptcy which led to an abrupt drop in the previous upward trend in bankruptcies before 2006 (White, 2009). Albanesi and Nosal (2018) noted that chapter 7 filings had a 50% drop in filings since the passage of BAPCPA while chapter 13 filings were largely unaffected.…”

Auto Credit and the 2005 Bankruptcy Reform: The Impact of Eliminating Cramdowns

“…Another set of papers focus on the negative effects of BAPCPA on consumers in financial distress. Albanesi and Nosal (2015) show that the increased costs of filing for bankruptcy led to fewer bankruptcy filings and increased court judgments and debt in collections. Morgan, Iverson, and Botsch (2012) and Li, White, and Zhu (2011) show that BAPCPA increased sub-prime foreclosures by making it more difficult to discharge unsecured debt in bankruptcy.…”

“…Brown et al (2016) andAlbanesi and Nosal (2015), which analyze the impact of state-level variation using the CCP data, also use subsamples of the full 5% random sample available in the Consumer Credit Panel (CCP)/Equifax Data.10 Our analysis drops borrowers in the 5 federal court districts in Washington D.C., Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands.…”

“…Research suggests three additional sources of geographic variation in the impact of BAPCPA: the cost of filing, the means test, and homestead exemptions. First, BAPCPA increased attorney fees, and the amount varied across states (Lupica, 2012, Albanesi andNosal, 2015). Second, BAPCPA's means test affected some states more than others.…”

The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit

“…Albanesi and Nosal (2015) document how the BAPCPA was only successful in decreasing the number of bankruptcies, as a larger fraction of insolvent individuals actually do not file because of the increased cost of filing. 3 In Canada, we observe a dramatic increase in proposals following the 2009 BIA amendments.…”