Fed Forum Personal Bankruptcy Reform of 2005: Means-Testing or Mean-Spirited? Astrid Dick Economist, Banking Studies Function Federal Reserve Bank of New York March 8, 2007
BAPCPA and means- -test test BAPCPA and means � Under old law… Under old law… � � All filers eligible for Chapter 7 All filers eligible for Chapter 7 � � Liquidation of Liquidation of nonexempt nonexempt assets assets � � But remaining unsecured debt But remaining unsecured debt discharged discharged � � Under new law… Under new law… � � Filers with income > state median may be Filers with income > state median may be � forced into Chapter 13 forced into Chapter 13 � Keep all assets Keep all assets � � But must repay most of debt over next five years But must repay most of debt over next five years �
Rapid increase in bankruptcy filings Rapid increase in bankruptcy filings Annual Consumer Bankruptcy Filings Per 1,000 households 20 BRA ’78 BAPCPA ’05 1 8 1 6 1 4 1 2 1 0 8 6 4 2 0 1 947 1 952 1 957 1 962 1 967 1 972 1 977 1 982 1 987 1 992 1 997 2002 S our ce: Adm inistr ative Of f ice of the U.S . Cour ts; Am er ican Bankr uptcy Institute
I s average Joe worse off? I s average Joe worse off? � Decrease in insurance against bad luck Decrease in insurance against bad luck � “America is…likely to turn into a “America is…likely to turn into a debt- -peonage society” peonage society” debt Paul Krugman Paul Krugman, NYT, March 8, 2005 , NYT, March 8, 2005
BAPCPA has upside BAPCPA has upside � Increased creditor protection lowers Increased creditor protection lowers � creditors’ costs creditors’ costs � With sufficient competition, savings get With sufficient competition, savings get � passed on to borrowers passed on to borrowers � Over $30 billion written off every year Over $30 billion written off every year � � Curb strategic filings by irresponsible Curb strategic filings by irresponsible � borrowers borrowers
Evidence on strategic filing Evidence on strategic filing � Reduced stigma Reduced stigma � � Forum shopping: consumers move to high Forum shopping: consumers move to high � exemption states before filing exemption states before filing � Financial incentives are main driver in Financial incentives are main driver in � decision to file decision to file
Rush to file Rush to file Bankruptcy filings per week 500,000 2005 400,000 300,000 200,000 100,000 2001-2004 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 Week of Year
Higher rush in higher exemption states Higher rush in higher exemption states Percent Change in Chapter 7 Filings 2005q4 over 2005q3 DC 100 80 VT 60 LA NV DE MD MA NJ MS 40 PA CT IL IN OH MI AK NY CA MO RI AL CO WY VA WA KY AR WV HI ND NE OR MT 20 ID NC MN GA UT SC NM WI ME NH TN AZ 0 0 100 200 300 400 500 Homestead exemption ($000s)
Strategic filings restrict access to Strategic filings restrict access to credit and increase costs credit and increase costs � More likely to be turned down for credit in More likely to be turned down for credit in � high exemption states high exemption states � Higher APRs in high exemption states Higher APRs in high exemption states � � Countries with more creditor protection Countries with more creditor protection � have greater private debt/GDP ratios have greater private debt/GDP ratios � lower BAPCPA reduces strategic filings � � BAPCPA reduces strategic filings lower � costs of credit costs of credit
Credit card competition is crucial Credit card competition is crucial � Without it, lower creditor costs are not Without it, lower creditor costs are not � passed on to consumers passed on to consumers � Doubts… Doubts… � � Credit card interest rates sticky Credit card interest rates sticky � � High profits High profits � � Complex pricing may confuse consumers about Complex pricing may confuse consumers about � true cost true cost � Creditors gain with BAPCPA passage Creditors gain with BAPCPA passage �
Costs of credit have not fallen yet… Costs of credit have not fallen yet… Spreads and Charge-offs Credit Card Asset-Backed Securities 16.00 BAPCPA ‘05 14.00 Percent of Portfolio Par 12.00 10.00 8.00 6.00 4.00 2.00 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06
…but they may: spreads rise and fall but they may: spreads rise and fall … with charge- -offs offs with charge 15 Percentage points 10 2006q3 5 0 1 1 1 1 1 q q q q q 5 0 5 0 5 8 9 9 0 0 9 9 9 0 0 1 1 1 2 2 spread xoffs
Potential downsides from BAPCPA Potential downsides from BAPCPA BAPCPA BAPCPA � reduces insurance reduces insurance � � Half of filers cite medical causes Half of filers cite medical causes � � reduces entrepreneurship reduces entrepreneurship � � reduces labor supply? reduces labor supply? �
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