Dynamic Implications of the Bankruptcy Waiting Period
Following the 2005 bankruptcy reforms in the U.S., households that discharge debt in Chapter 7 must wait eight years to refile instead of the previously mandated six years. This policy is unique to U.S. law and creates an unusual combination of contemporaneous costs and benefits for households. On the one hand, households temporarily lose their partial insurance against financial distress. On the other hand, post-bankruptcy households may receive improved credit offers as a result of increased expected repayments. To analyze the dynamics of the waiting period, I develop a quantitative theory of unsecured credit with default and endogenous credit scoring. I find that the change from six to eight years decreased default rates by 9.72\%. This result leads to higher borrowing and lower interest rates. This result suggests the increased costs of default offset the benefits. To understand the mechanisms driving this result, I investigate the dynamic consequences of default under various waiting periods. I show that defaulting households under longer waiting period regimes suffer larger drops in their credit scores and borrowing. More importantly, I show that these consequences persist such that a one year increase in the waiting period results in 2.1\% lower credit scores 20 years after default. Thus, while a longer waiting period may provide for better credit offers during a household's time without the option, it ultimately depresses its credit score, borrowing, and consumption long after default.
All or Nothing: Understanding the Chapter 13 Bankruptcy Puzzle
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) ushered in the era of means-testing to qualify for Chapter 7 "fresh-start" bankruptcy. One major rationale for the policy was that households with the means to repay their debts could choose Chapter 13 "repayment plan" bankruptcy as an alterative. Using data from PACER bankruptcy filings and the National Longitudinal Survey of Youth (1979), I confirm that there is a drop in Chapter 7 filings among above-median income households as a result of means-testing. Contrary to expectations, there is no bump in Chapter 13 filings which would suggest a substitution effect. In fact, Chapter 13 filings also exhibit a drop in filings slightly above the means-testing cutoff. This suggests that there is a Chapter 13 puzzle which requires further investigation. In addition to identifying this puzzle, I take important steps towards resolving the puzzle. I show that there is evidence of substitution in states with large homestead exemptions such that a 1% increase in homestead exemptions is associated with a 1.3% increased likelihood that a Chapter 13 filer has above-median income. This suggests that many of the pre-BAPCPA Chapter 7 filers with above-median income would not benefit from the real property protections offered by Chapter 13. Thus, for these households, Chapter 13 provides limited upside. Finally, I explore additional mechanisms regarding the lack of substitution including, (1) households near the cutoff avoid Chapter 13 because they have a higher likelihood of transitioning into future Chapter 7 eligibility; and (2) households that previously filed for Chapter 7 and later converted to Chapter 13, no longer enter the system in the first place.
Estimating the Bankruptcy Option Premium: Evidence from Credit Cards
What would happen to unsecured credit markets in the United States if existing consumer bankruptcy laws were eliminated? I estimate that average equilibrium interest rates would decrease by as little as 49 basis points. I arrive at this estimate by constructing a static model of bankruptcy and delinquency. I inform the model by exploiting a feature of bankruptcy law which creates a natural experiment. In particular, households that file for bankruptcy cannot file again for eight years. During this time, it is as if these households live in a counterfactual environment in which the bankruptcy option does not exist. Using data from the Survey of Consumer Finances, I use the reported unsecured credit card interest rates, self-reported delinquency rate, and years post-bankruptcy to inform the model. These results raise important questions regarding the upside of creditor-friendly bankruptcy reforms when creditors have limited options for recovering debt in informal bankruptcy.