The Economist reports that the evidence resulting from studies after the passage of BAPCPA indicate that the rules for Chapter 7 debtors might be too strict.
The authors first looked at the effect on consumer bankruptcy filings (see chart).
Although the change was designed to encourage people to file Chapter 13, paying at least some of their debts, the long term effect was slightly different.
The reform had a big impact. At least at first, Chapter 13 filings rose relative to Chapter 7 ones.
In a new paper, from Stefania Albanesi, of the New York Federal Reserve, and Jaromir Nosal, of Columbia University, finds that the reform led to a permanent drop in the bankruptcy rate. Will Dobbie of Princeton University and Jae Song, of the Social Security Administration, have made finding that suggests that this is not necessarily a good thing.
Messrs Dobbie and Song argue that tougher laws decrease the debtor’s incentive to work and increase his proclivity to slip out of town, change his job and close down his bank account.
“On average, those granted bankruptcy earned over $6,000 more in the subsequent year than similarly-placed plaintiffs who were rejected. The unlucky ones found it trickier to service their mortgages. Michelle White of the University of California, San Diego and colleagues found that bankruptcy reform caused the default rate on prime mortgages to rise 23%.”
Figures released on March 6th by the Federal Reserve show that consumer debt rose for the 41st straight month (see chart). With inflation low and wages weak, that is worrying. Ms White wants to roll back some of the reform of 2005, making bankruptcy cheaper. Whether that just increases profligacy remains to be seen.
For the original article: Economist: Bankruptcy and the Economy | A Fresh Start
