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  • American Economic Review

The Economic Consequences of Bankruptcy Reform

By: Tal Gross, Ray Kluender, Feng Liu, Matthew J. Notowidigdo and Jialan Wang
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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.

Keywords

Bankruptcy; Bankruptcy Abuse Prevention And Consumer Protection Act; Borrowing and Debt; Credit

Citation

Gross, Tal, Ray Kluender, Feng Liu, Matthew J. Notowidigdo, and Jialan Wang. "The Economic Consequences of Bankruptcy Reform." American Economic Review 111, no. 7 (July 2021): 2309–2341.
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About The Author

Raymond P. Kluender

Entrepreneurial Management
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More from the Authors
  • ELCA's Series A By: Anke Becker, Ray Kluender and William R. Kerr
  • Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior By: Ray Kluender
  • The Impact of Financial Assistance Programs on Health Care Utilization: Evidence from Kaiser Permanente By: Alyce S. Adams, Raymond Kluender, Neale Mahoney, Jinglin Wang, Francis Wong and Wesley Yin
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