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The Economic Consequences of Bankruptcy Reform (WP-19-24)

Tal Gross, Raymond Kluender, Feng Liu, Matthew Notowidigdo, and Jialan Wang

A more generous consumer bankruptcy system provides greater insurance against financial risks, but it may also raise the cost of credit to consumers. The researchers study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which raised the costs of filing for bankruptcy. They identify the effects of BAPCPA on borrowing costs by exploiting variation in the effects of the reform on bankruptcy risk across credit-score segments. Using a combination of administrative records, credit reports, and proprietary market-research data, they find that the reform reduced bankruptcy filings, and reduced the likelihood that an uninsured hospitalization received bankruptcy relief by 70 percent. BAPCPA led to a decrease in credit card interest rates, with an implied pass-through rate of 60–75 percent. Overall, BAPCPA decreased the gap in offered interest rates between prime and subprime consumers by roughly 10 percent.

Tal Gross, Associate Professor of Markets, Public Policy & Law, Boston University

Raymond Kluender, Assistant Professor of Business Administration, Harvard Business School

Feng Liu, School of Economics and Institute for Advanced Research

Matthew Notowidigdo, Associate Professor of Economics and IPR Fellow, Northwestern University

Jialan Wang, Assistant Professor of Finance, University of Illinois at Urbana-Champaign

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