Personal Bankruptcy: A Literature Review

PERSONAL BANKRUPTCY: A LITERATURE REVIEW

September 2000

NOTES

Shaded areas in figures represent recessions as defined by the National Bureau of Economic Research. The areas extend from the peak to the trough of the recessions.

Annual data on personal bankruptcy filings end on June 30 of the year indicated. Other annual data refer to calendar years.

Numbers in the text and tables may not add up to totals because of rounding.

PREFACE

The sharp rise in personal bankruptcy filings between 1994 and 1998, a period of economic expansion, has renewed a long-standing debate about bankruptcy laws. One side of that debate ascribes a significant share of the rise in filings to the current law and to a lessening of the stigma associated with filing for bankruptcy. The other side of the debate argues that the rise primarily reflects an increase in financial distress within the consumer sector. This Congressional Budget Office (CBO) paper reviews the available data and evaluates the empirical research on personal bankruptcy. It was prepared at the request of John Conyers Jr., Ranking Democratic Member, House Committee on the Judiciary; Jerrold Nadler, Ranking Democratic Member, Subcommittee on Commercial and Administrative Law of the House Committee on the Judiciary; and Representatives William D. Delahunt and Martin T. Meehan.

Kim Kowalewski of CBO's Macroeconomic Analysis Division prepared the paper under the supervision of Robert Dennis. At CBO, Coleman Bazelon, Doug Hamilton, Arlene Holen, Debbie Lucas, Angelo Mascaro, John Peterson, David Torregrosa, and Christopher Williams offered helpful comments, and David Arnold, Ezra Finkin, John McMurray, and Michael Simpson provided capable research assistance. Thanks are due to Ian Domowitz of Pennsylvania State University, Stanley Longhofer of Wichita State University, Dean Maki of the Board of Governors of the Federal Reserve System, Preston Miller of the Federal Reserve Bank of Minneapolis, and Tim Muris and Todd Zywicki of George Mason University's School of Law for their comments on earlier drafts. Special thanks go to Melissa Jacoby of the Beasley School of Law at Temple University for sharing her expertise on countless occasions regarding personal bankruptcy and the law, and to Marilyn Miller of the Administrative Office of the U.S. Courts for promptly filling requests for data on bankruptcy filings. Kevin Brown of the Federal Deposit Insurance Corporation kindly supplied and explained the data on commercial banks.

Leah Mazade edited the paper, and Christine Bogusz proofread it. Verlinda Lewis-Harris typed the paper and prepared the manuscript for final publication. Annette Kalicki prepared the electronic versions for CBO's World Wide Web site ().

Questions about the analysis may be addressed to Kim Kowalewski at (202) 226-2776.

September 2000

Dan L. Crippen Director

CONTENTS

SUMMARY

vii

THE FUNDAMENTALS OF PERSONAL BANKRUPTCY LAW

1

Debt Collection and Insurance Basic Provisions of Chapter 7 Basic Provisions of Chapter 13

TRENDS IN PERSONAL BANKRUPTCY FILINGS

4

The Personal Filing Rate in the Postwar Period The Personal Filing Rate and the Household Sector's

Risk of Default

FACTORS LEADING TO PERSONAL BANKRUPTCY

11

Macroeconomic Factors Legal Incentives to File for Bankruptcy The Stigma of Bankruptcy

THE ABILITY OF CHAPTER 7 FILERS TO REPAY THEIR DEBTS

23

Means-Testing Proposals from the 105th and 106th Congresses Studies Estimating Debt-Repayment Capacity Under the Proposals Implications of the Studies' Estimates Uncertainties Surrounding the Estimates

HOW PERSONAL BANKRUPTCY AFFECTS

THE SUPPLY OF CREDIT

31

Creditors' Responses to Personal Bankruptcy Provisions The Impact of Personal Bankruptcy on Creditors' Losses Explaining the Recent Decline in Personal Filings

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