Consumer Bankruptcies Research Articles

The effect of the Affordable Care Act Medicaid expansion on consumer bankruptcies

AbstractMedical expenses have been associated with a large proportion of consumer bankruptcies in the United States. The objective of this study is to examine the relationship between the Medicaid expansion implemented in the context of the Affordable Care Act and consumer bankruptcy, overall and by chapter filing. We used a longitudinal study design with a study period of 2008–2017. We tested three approaches: difference‐in‐differences, fixed effect panel linear regression, and triple difference. We constructed a panel dataset from 2008 to 2017 with states’ data using data from various sources on insurance, bankruptcy filings, and characteristics that may affect bankruptcy, such as income and ethnicity. The outcomes were the annual rates of consumer bankruptcies overall and by chapter at the state level. Between 2008 and 2017, the overall unadjusted bankruptcy filing rate fell from 0.36% to 0.24%. We found that the expansion was associated with a decrease in overall consumer bankruptcy varying between 0.035 and 0.039 percentage points and that the intensity of the effect was modulated by the intensity of the treatment. Results were consistent across models and suggest that the Medicaid expansion had a significant negative effect on overall bankruptcy filings and specifically on Chapter 7 filings.

Insurance Subsidies, the Affordable Care Act, and Financial Stability

AbstractThis paper measures the effects of subsidies in the Affordable Care Act on adverse financial outcomes using administrative tax data and credit data on financial outcomes. Using a difference‐in‐differences design with propensity score reweighting, I find that at $100 per capita, ACA premium tax credits and cost‐sharing reduction subsidies reduced consumer bankruptcies and severe auto delinquency by 8 percent and 7 percent, respectively, and substantially reduced right‐tail delinquent debt and third‐party collections. The value of recipients’ risk protection against medical debt payments amounts to approximately 16 to 21 percent of the cash costs of the subsidies, while the subsidies provided substantial indirect transfers to external parties.

Implementing artificial intelligence in forecasting the risk of personal bankruptcies in Poland and Taiwan

Research background: The global financial crisis from 2007 to 2012, the COVID-19 pandemic, and the current war in Ukraine have dramatically increased the risk of consumer bankruptcies worldwide. All three crises negatively impact the financial situation of households due to increased interest rates, inflation rates, volatile exchange rates, and other significant macroeconomic factors. Financial difficulties may arise when the private person is unable to maintain a habitual standard of living. This means that anyone can become financially vulnerable regardless of wealth or education level. Therefore, forecasting consumer bankruptcy risk has received increasing scientific and public attention. Purpose of the article: This study proposes artificial intelligence solutions to address the increased importance of the personal bankruptcy phenomenon and the growing need for reliable forecasting models. The objective of this paper is to develop six models for forecasting personal bankruptcies in Poland and Taiwan with the use of three soft-computing techniques. Methods: Six models were developed to forecast the risk of insolvency: three for Polish households and three for Taiwanese consumers, using fuzzy sets, genetic algorithms, and artificial neural networks. This research relied on four samples. Two were learning samples (one for each country), and two were testing samples, also one for each country separately. Both testing samples contain 500 bankrupt and 500 nonbankrupt households, while each learning sample consists of 100 insolvent and 100 solvent natural persons. Findings & value added: This study presents a solution for effective bankruptcy risk forecasting by implementing both highly effective and usable methods and proposes a new type of ratios that combine the evaluated consumers? financial and demographic characteristics. The usage of such ratios also improves the versatility of the presented models, as they are not denominated in monetary value or strictly in demographic units. This would be limited to use in only one country but can be widely used in other regions of the world.

The Impact of the COVID-19 Pandemic on Consumer Bankruptcies

This manuscript conducts a simple, exploratory analysis to test whether the use of the consumer bankruptcy process fundamentally differed during the COVID-19 pandemic compared to previous years. Data were drawn from the Public Access to Court Electronic Records (PACER) database maintained by the U.S. Bankruptcy Court’s Eastern District of Washington for the years 2007, 2011, 2016, and 2020. Kruskal￾Wallis tests indicate that filers in 2020 had lower average real monthly incomes than in previous years. However, household incomes were not statistically different from previous years. Filers in 2020 has significantly more debt in collections compared to 2007, but no more or less debt than in 2011 or 2016. Chi-square tests report a significantly greater proportion of filings with debts owed to collections agencies in 2020 compared to previous years. Overall, the findings suggest that the pandemic did significantly alter the use, and intensity of use, of the consumer bankruptcy process.

The Impact of the Crisis Triggered by the COVID-19 Pandemic and the Actions of Regulators on the Consumer Finance Market in Poland and Other European Union Countries

The economic crisis triggered by the COVID-19 outbreak has severely affected the global economy. The ultimate scale of the recession is yet to be determined, but it is likely to be the most dramatic slump since World War II. The impact of the crisis on the financial sector, especially consumer finance, could almost instantly be observed. The article shows how determination and consistency in regulatory actions counteracts the effects of the pandemic crisis for the banking sector and consumer finance. The conducted research has shown the existence of a number of social phenomena typical of this type of global crisis, such as shopping panic, reduced creditworthiness of households related to loss of income, unemployment and increased crime. At the same time, the actions of financial market regulators turned out to be very effective (no negative structural phenomena occurred in the financial market). The accuracy of the selection of instruments and the speed of action limited the social and financial effects of the pandemic, including a loan repayment memorandum, limiting the cost of consumer loans and supporting the banking sector, which will limit the scale of excessive household debt and consumer bankruptcies, and companies were also supported. The research was conducted on the basis of available literature on the subject, market analyses and a review of regulations implemented at the central level and in individual EU member states.

Bankruptcy and the COVID-19 Crisis

We examine the impact of the COVID-19 economic crisis on business and consumer bankruptcies in the United States using real-time data on the universe of filings. Historically, bankruptcies have closely tracked the business cycle and contemporaneous unemployment rates. However, this relationship has reversed during the COVID-19 crisis thus far. While aggregate filing rates were very similar to 2019 levels prior to the severe onset of the pandemic, filings by consumers and small businesses dropped dramatically starting in mid-March, contrary to media reports and many experts' expectations. The total number of bankruptcy filings is down by 27 percent year-over-year between January and August. Consumer and business Chapter 7 filings rebounded moderately starting in mid-April and stabilized around 20 percent below 2019 levels, but Chapter 13 filings remained at 55-65 percent below 2019 levels through the end of August. In contrast to the 2007-9 recession, states with a larger increase in unemployment between April and July experienced greater drops in bankruptcies. Although they make up a small share of overall bankruptcies, Chapter 11 filings by large corporations have increased since 2019, and are up nearly 200 percent year-over-year from January through August. These patterns suggest that the financial experiences of consumers, small businesses, and large corporations have diverged during the COVID-19 crisis. Large businesses have continued to seek and receive relief from the bankruptcy system as they would during a normal recession, and relatively wealthy homeowners have on average benefited from the fiscal stimulus and housing moratoria mandated by the CARES Act and other policies. However, non-homeowners and small businesses may face financial, physical, and technological barriers to accessing the bankruptcy system, especially in the areas hardest-hit by unemployment.

Manipulating Random Assignment: Evidence From Consumer Bankruptcies in the Nation's Largest Cities

Random case assignment is thought to be an important feature of decision-making in federal courts because it helps guard against favoritism (actual or perceived) toward particular parties or types of cases. In bankruptcy courts, cases are randomly assigned to both judges and trustees. In Chapter 7 cases, for example, the trustee is a quasi-judicial actor, typically a private-sector lawyer, who has been selected to audit the debtor's finances, find and liquidate assets, and police compliance with the law. We study three major bankruptcy jurisdictions (covering Chicago, Los Angeles, and parts of New York) and find that the random-assignment process for Chapter 7 trustees is failing in two of them (Chicago and New York). We introduce several measures of non-random assignment. Across all measures, random assignment is failing: Trustees within the same court have substantially different case characteristics, despite the purportedly random assignment process. We present evidence that the imbalance in case characteristics is caused by attorney manipulation: Attorneys strategically time their case filings to avoid or attract particular trustees (trustee shopping). By contrast, among cases filed by debtors who have not hired attorneys (pro se filers), there is no case imbalance across trustees. Because they do not engage in manipulation, pro se filers – who account for the bottom decile of income and asset values among Chapter 7 debtors – are the debtors most burdened by trustee-shopping by bankruptcy attorneys. We conclude by presenting evidence that trustee-shopping is less prevalent in Los Angeles due to differences in its random-assignment protocol.

Asset Exemptions and Consumer Bankruptcies: Evidence from Individual Filings

AbstractCombining case-level data on all consumer bankruptcies in the last decade with changes in states’ homestead exemptions, we estimate how exemptions affect the number and composition of bankr...

Improved Matching, Directed Search, and Bargaining in the Credit Card Market

I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms direct their search to consumers. Upon a match, they bargain over borrowing limits and borrowing interest rates - fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms, calibrated to match the rise in the population with credit cards, accounts for the rise in revolving credit and consumer bankruptcies in the United States. I also provide empirical evidence consistent with the two key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are 3.55 percent - substantially larger than those previously estimated by alternative explanations for the rise in revolving credit and consumer bankruptcies (0.03-0.57 percent). Finally, I analyze how the credit card firm’s bargaining power impacts the welfare of introducing stricter bankruptcy laws.

Bankruptcy stigma and the second chance policy: the impact of bankruptcy stigma on business restructurings in China, Europe and the United States

This paper deals with a topic of common concern to China, Europe and the United States: the negative effects of bankruptcy stigma on the second chance (fresh start) policy encouraging restructuring of businesses as an alternative to their liquidation. In most Continental European civil law systems, for example, business restructurings are still only aspirations rather than reality. This is to a great extent due to the ubiquity of intense bankruptcy stigma as a consequence of what, for example, creditors as well as the directors and officers of the bankrupt debtor avoid participating in restructuring proceedings. The resulting dominance of liquidations is perceived as a competitive disadvantage both for China and Europe compared to the United States that possesses the top model enshrined in Chapter 11 of the US Bankruptcy Code. It was for these practical reasons that the second chance policy was given clear priority by the European Union as best expressed in the Commission Recommendation of 12 March 2014 on a New Approach to Business Failure and Insolvency. Similar policy shift characterizes the 2007 Enterprise Insolvency Law of the People’s Republic of China as visible from Chapter 8 on reorganisation and Chapter 9 on compositions (workouts). While bankruptcy stigma is present also in the United States, its effects are the least “biting” in this country and are an issue primarily in the context of consumer-bankruptcies. In light of the above, this article’s main claim is that without proper understanding and acknowledging the impact of bankruptcy stigma, hardly could lawmakers’ efforts aimed at forging a legal environment that would incentivize restructurings of financially distressed businesses yield success. Although some research on the topic is available, it tends to be focused on consumer bankruptcies only. A comprehensive, empirically based, inter-disciplinary scrutiny of the impact of stigma on business reorganisations is still lacking just like a “handbook” for combating the bankruptcy stigma. This article attempts to open the doors to this new inter-disciplinary area of law with the tools of comparative law. Besides canvassing the pertaining scholarship’s hereinbefore achievements, the paper extends also to such so far neglected niches of the globe as China and the post-socialist countries of Central and Eastern Europe.

Economic Rehabilitation: Understanding the Growth in Consumer Proposals under Canadian Insolvency Legislation

Economic rehabilitation is the notion underlying Canada’s Bankruptcy and Insolvency Act (BIA), providing consumer debtors with an opportunity for a “fresh start” through the mechanism of bankruptcy or making a proposal to their creditors for payment of their debts on terms that allow them to rehabilitate their financial status. This article undertakes a comparison of consumer proposals and consumer bankruptcies, examining 5,773 individual insolvencies in the past two years, with a view to discerning choices by individual insolvent debtors of insolvency proceeding. It compares causes of financial distress, income levels, quantum of debt and the assets of those filing proposals or bankruptcies. The data indicate that overextension of credit is a primary cause of insolvency, being 20% to 24% the primary cause across all cohorts. Home mortgage liability is significant for the Division I proposal debtors, but less significant for bankrupts, many of whom do not have equity in homes. Credit card debt is a serious problem across all groups. Credit card debt, unlike fixed loans such as mortgages, can quickly escalate, is owed at much higher interest rates that can rapidly compound financial distress, and the lack of a defined payment plan, other than a minimum payment, means that consumer debtors are not encouraged to pay these debts first, leading to longer term financial distress. Yet, to date, insolvency policy does not really factor the nature of this debt into policy development. Job loss and seasonal employment together are a significant cause of insolvency across Division II consumer proposal debtors (26%), Division II business proposal debtors (33%), and bankrupts (28%), but less so for Division I proposal debtors (16%). These data suggest that there are broader economic and social challenges that need to be addressed, as financial distress is often beyond the control of the individual debtor. To date, there is little linkage in Canada between economic stimulus and employment policy development and insolvency law policy development. Medical reasons are also a significant cause for Division II business proposal debtors (15%) and bankruptcy (11%), compared with the other cohorts. However, it is uncertain whether medical bills and lack of coverage, or medical problems resulting in inability to earn sufficient income are the real source of the financial distress. Equally, medical debt may be masked if consumer debtors have paid for medical bills by credit card on exit from hospital or particular outpatient services, as is the normal practice in some regions. The study offers both observations on the data and recommendations for future research and policy development.

The Democratization of Credit and the Rise in Consumer Bankruptcies

Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the “new” cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.

Lawyers Steer Clients Toward Lucrative Filings: Evidence from Consumer Bankruptcies

Consumers often rely on lawyers to make complicated legal decisions, though in many cases, the lawyer’s financial interests are at odds with those of the client. We consider this general problem in the context of consumers filing for bankruptcy. Lawyers advise debtors on whether to file the cheaper Chapter 7 filing or the more expensive, and more likely to be dismissed, Chapter 13 filing. We show that bankruptcy courts that allow lawyers to charge more for Chapter 13 bankruptcy filings see a larger fraction of Chapter 13 filings. This is true controlling for a host of demographic controls at the zip code level, as well as with state fixed effects.

Lawyers Steer Clients Toward Lucrative Filings: Evidence from Consumer Bankruptcies

Consumers often rely on lawyers to make complicated legal decisions, though in many cases the lawyer's financial interests are at odds with those of the client. We consider this general problem in the context of consumers filing for bankruptcy. Lawyers advise debtors on whether to file the cheaper Chapter 7 filing or the more expensive Chapter 13 filing. Bankruptcy courts that allow lawyers to charge more for Chapter 13 bankruptcy see a significantly larger fraction of Chapter 13 filings (elasticity of 0.3). This is true controlling for a host of demographic controls at the zip code level, as well as with state fixed effects and district policy controls. Our estimates suggest that 5.4% of cross-district variation in relative Chapter 13 rates could be eliminated by harmonizing relative fees.

Effects of the BAPCPA on the chapter composition of consumer bankruptcies

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act limited homestead exemptions and imposed means test to discourage petitioners seeking financial benefits. We find that these restrictions were effective in steering petitioners away from Chapter 7 filings and into Chapter 13.

Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates

We estimate the extent to which legal and administrative fees prevent liquidity-constrained households from declaring bankruptcy. To do so, we study how the 2001 and 2008 tax rebates affected consumer bankruptcy filings. We exploit the randomized timing of the rebate checks and estimate that the rebates caused a significant short-run increase in consumer bankruptcies in both years, with larger effects in 2008 when the rebates were more generous and more widely distributed. Using hand-collected data from individual bankruptcy petitions, we document that households that filed shortly after receiving their rebate checks had higher average liabilities and liabilities-to-income ratios.

Holding the high ground: The position of secured creditors in consumer bankruptcies and proposals

This article examines the position of secured creditors in the event of a consumer debtor's bankruptcy or the filing of a consumer proposal, as determined by the federal and provincial laws of Canada. Secured creditors in Canada are in a remarkably powerful position relative to other claimants in bankruptcy and to their counterparts in the United States. Their rights of realization against the collateral are essentially unaffected by the initiation of either a consumer bankruptcy or proposal. Moreover, recent judicial developments appear to further enhance secured creditors' rights of enforcement, both against the in personam payment obligation and against the bankrupt's property after his or her discharge. This article is available in Osgoode Hall Law Journal: http://digitalcommons.osgoode.yorku.ca/ohlj/vol37/iss1/12 HOLDING THE HIGH GROUND: THE POSITION OF SECURED CREDITORS IN CONSUMER BANKRUPTCIES AND PROPOSALS© By TAMARA M. BUCKWOLD* This article examines the position of secured creditors in the event of a consumer debtor's bankruptcy or the filing of a consumer proposal, as determined by the federal and provincial laws of Canada. Secured creditors in Canada are in a remarkably powerful position relative to other claimants in bankruptcy and to their counterparts in the United States. Their rights of realization against the collateral are essentially unaffected by the initiation of either a consumer bankruptcy or proposal. Moreover, recent judicial developments appear to further enhance secured creditors' rights of enforcement, both against the in personam payment obligation and against the bankrupt's property after his or her discharge. Cet article examine la position des cr6anciers garantis dans le cas d'une faillite de consommateurs d6biteurs ou la r6clamation par une proposition de consommateurs, tels que d6termin6s par les lois f6d6rales et provinciales au Canada. Les cr6anciers garantis sont dans une position de force remarquable par rapport aux autres plaignants en faillite et par rapport A leurs homologues aux Etats-Unis. Leurs droits de r6alisation contre le collat6ral ne sont essentiellement pas affect~s ni par l'initiation d'une faillite de consommateurs ni par une proposition. En plus, des d~veloppements juridiques r6cents semblent favoriser davantage le renforcement des droits des cr6anciers garantis, a ]a fois contre l'obligation de paiement in personam et contre la propri6t6 de la personne en failliteapr-s son acquittement.

State Mandated Disability Insurance as Salve to the Consumer Bankruptcy Imbroglio

From Main Street to Wall Street, Americans are hurting. In 2009, over 1.4 million families filed for bankruptcy. Researchers examining the causes of bankruptcy discovered that as many as sixty-two percent of all bankruptcies were precipitated by a medical crisis. Because many Americans are living paycheck to paycheck and lack disability insurance, when a medical crisis strikes, bank accounts are quickly depleted by the amalgam of high medical bills and lost wages. Disability insurance provides needed wage replacement when a worker is unable to work due to an illness or injury. This Article presents the case for state mandated disability insurance as a solution for combating the rising number of consumer bankruptcies. It describes the prevalence of medical bankruptcies and the impact of disabilities on American families, as well as the most commonly available substitutes for comprehensive disability insurance and explains why these substitutes do not provide workers with adequate wage protection. Then, this Article presents state-mandated disability insurance as a solution to the medical bankruptcy imbroglio and provides statistical evidence demonstrating that states mandating disability insurance for most workers have on average a lower per capita bankruptcy rate than the national average. Finally, this Article argues that the best alternative for increasing access to disability insurance is for more states to mandate disability insurance and provides a blueprint for designing state disability insurance programs.

An Examination of the Adverse Effects of Consumer Loans

The dramatic increase in the consumer debt burden and consumer bankruptcies are indications that restrictionsshould be imposed on the availability of consumer unsecured loans. Financial services firms treat consumerunsecured loans as if they are evaluating business loans. They treat the pool of loan applicants as if they are apool of insurance applicants Consumers on the other hand see the easy credit as an opportunity to abandon fiscalresponsibility and depend on borrowing to meet their consumption needs. The explosion of the real estate markethelped support this obsession with debt-financed consumption. This paper discusses the negative effect ofconsumer debt for consumption and argues that credit card return to its original intent as a convenient means ofpayment; that all non-investment consumer loans be severely restricted due to its disparaging harmful effect tothe segment of the society that can least afford it.

Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates

This paper estimates the extent to which legal fees prevent liquidity-constrained households from declaring bankruptcy. To do so, it studies how the 2001 and 2008 income tax rebates affected consumer bankruptcy filings. We exploit the randomized timing of the rebate checks and estimate that the rebates caused a significant, short-run increase in consumer bankruptcies in both years, with larger effects in 2008 when the rebates were more generous and more widely distributed. Using hand-collected data from individual bankruptcy petitions, we document that the rebates caused an increase in the total liabilities and debt-to-income ratios of filers.