| Abstract: |
From 1980 to 2004, the number of personal bankruptcy filings in the United
States increased more than five-fold, from 288,000 to 1.5 million per year.
Lenders responded to the high filing rate with a major lobbying campaign for
bankruptcy reform that led to the adoption in 2005 of the Bankruptcy Abuse
Prevention and Consumer Protection Act (BAPCPA), which made bankruptcy law
much less debtor-friendly. The paper first examines why bankruptcy rates
increased so sharply. I argue that the main explanation is the rapid growth in
credit card debt, which rose from 3.2% of U.S. median family income in 1980 to
12.5% in 2004. The paper then examines how the adoption of BAPCPA changed
bankruptcy law. Prior to 2005, bankruptcy law provided debtors with a
relatively easy escape route from debt, since credit card debt and other types
of debt could be discharged in bankruptcy and even well-off debtors had no
obligation to repay. BAPCPA made this escape route less attractive by
increasing the costs of filing and forcing some high-income debtors to repay
from post-bankruptcy income. However, because many consumers are hyperbolic
discounters, making bankruptcy law less debtor-friendly will not solve the
problem of consumers borrowing too much. This is because, when less debt is
discharged in bankruptcy, lending becomes more profitable and lenders increase
the supply of credit. The paper examines the determinants of an optimal
bankruptcy law. It also considers the relationship between bankruptcy law and
regulation of lending behavior and discusses proposals that would reduce
lendersÃÂâÃÂÃÂÃÂàincentives to supply too much credit to
debtors who are likely to become financially distressed. |