An Anatomy of U.S. Personal Bankruptcy Under Chapter 13

Eraslan, Hülya; Koşar, Gizem; Li, Wenli; Sarte, Pierre-Daniel G.

doi:10.1111/iere.12231

“…Chapter 13 filers may be at a disadvantage given their substantial recidivism in delinquency. As shown in Norberg and Velkey (2007) and Eraslan et al (2014), only 33% of all Chapter 13 filers successfully complete the court mandated repayment plan. Moreover, 30-33% of Chapter 13 filers whose bankruptcy was discharged or dismissed filed again at least once.…”

Section: Insolvency Bankruptcy and Access To Creditmentioning

confidence: 98%

Insolvency after the 2005 Bankruptcy Reform

Albanesi,

Nosal

2015

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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. * For useful comments, we wish to thank

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“…First, Chapter 7 bankruptcy is the form of bankruptcy that offers the most effective form of debt relief, when the bankruptcy is discharged, and comprises the largest fraction of bankruptcy procedures, both pre-and post reform. As shown in Norberg and Velkey (2007) and Eraslan et al (2014), only 33% of all Chapter 13 bankruptcies are discharged, which corresponds to the fraction of filers that successfully complete the court mandated repayment plan. 2002 2003 2006 2007 2008 2009 2010 2011 2012--1 4 2002 2003 2006 2007 2008 2009 2010 2011 2012 Figure 3: β s(t) for 4 quarter ahead transition probability from Newly Delinquent (left panel) and Newly Insolvent (right panel) to Chapter 13 bankruptcy filings.…”

Section: The Effects Of Bapca Over Timementioning

confidence: 99%

Insolvency After the 2005 Bankruptcy Reform

Albanesi

¹

,

Nosal²

2018

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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.

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“…Eraslan et al. () found that that completion of repayment plans depends heavily on the debtors’ circumstances following filing. Shocks to income from unemployment and family disruption are significant predictors of whether a repayment plan is completed (Elul and Gottardi, ).…”

Section: Conceptual Model Of Financial Well‐beingmentioning

confidence: 99%

Forms of Wealth Associated with Attaining Peer Group Net Worth Following Bankruptcy

Palmer¹,

Bhargava²

2017

Social Science Quarterly

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Objectives. This study examines the contribution of general human capital, social capital, and financial management practices to the individual's relative financial well-being following bankruptcy. Methods. Multivariate logistic regression models were estimated using secondary data from the Survey of Consumer Finances 2004 and 2007. Results. Individuals who possess higher general human capital and greater access to social capital are significantly more likely to achieve net worth parity with nonfilers following bankruptcy compared to similar individuals with lower levels of general human capital and social capital. Conclusion. Human and social capital are relatively more important factors contributing to attaining net worth parity with peers following bankruptcy than financial management practices and attitudes when controlling for ownership of protected assets. Congressionally mandated financial management training and counseling would likely have substantially better outcomes on bankruptcy filers' financial well-being over the long term if additional human-capital-building-and consequently income-building-programs are integrated into the mandated financial management training.

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An Anatomy of U.S. Personal Bankruptcy Under Chapter 13

Cited by 12 publications

References 38 publications

Insolvency after the 2005 Bankruptcy Reform

Insolvency after the 2005 Bankruptcy Reform

Insolvency After the 2005 Bankruptcy Reform

Forms of Wealth Associated with Attaining Peer Group Net Worth Following Bankruptcy

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