Consumer Bankruptcy Research Articles

Abuse or Protection? Consumer Bankruptcy Reform under ‘BAPCPA’

Entre 1980 et 2004, le nombre de candidatures à la faillite personnelle aux États-Unis a plus que quintuplé, passant de 288 000 à 1,5 million par an. Les prêteurs ont réagi à cette augmentation par une campagne de lobbying qui conduisit à l’adoption en 2005 de la loi de prévention de l’abus de faillite et de protection du consommateur (BAPCPA), qui a eu pour effet de rendre la loi sur les faillites moins favorable au débiteur. Avant 2005, la loi américaine sur les faillites offrait aux débiteurs une voie de sortie assez facile de la dette, dans la mesure où celle-ci, liée aux cartes de crédit comme aux autres types de prêts pouvait être éliminée par la faillite ; même les débiteurs riches n’avaient aucune obligation à rembourser. La BAPCPA a rendu cette voie de sortie moins attractive en augmentant les coûts de la candidature et en forçant certains débiteurs à revenus élevés à rembourser à partir de leur revenus postérieurs à la faillite. L’article examine comment la BAPCPA a fait pencher la balance non plus dans le sens d’une assurance de la consommation pour les débiteurs, mais vers une protection des créanciers en pénalisant le défaut de paiement. Il brosse les grands traits d’une procédure optimale de faillite et contraste le fardeau supporté dans la procédure de faillite par les différentes parties dans les lois française et allemande, d’une part, et américaine, d’autre part.

The New Home Mortgage Bankruptcy Proposals and the Constitutional Right to Housing

The National Association of Consumer Bankruptcy Attorneys, the Consumer Federation of America and the Center for Responsible Lending, have called for changes in the Bankruptcy Code as it affects housing. With respect to my remarks on the Constitutional status of housing (The Eminent Domain Revolt: Changing Perceptions in a New Constitutional Epoch, New York: Algora Publishing, 2006), I have commented on the proposals.

Business Bankruptcy Reorganization in Light of B.A.P.C.P.A

Representing the most comprehensive set of bankruptcy reforms in more than 25 years, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became effective on Oct 17 2005. Though the primary focus of the Act is to discourage abusive consumer bankruptcy filings, BAPCPA adds numerous provisions that subject a corporate debtor to an enhanced financially and operationally constrained environment. The decision to reorganize is largely based on the expectation that the plan would get approved within the court approved deadline. The proposed onerous financial and operational limitations that a corporate debtor would be subjected to in a bankruptcy proceeding add to the woes of companies seeking reorganization. The paper compares the old regime with the new rules and proposes that BAPCPA may drive some debtors to prepare the company for sale rather than reorganize as a going concern. There are different structures that a debtor may use to prepare a company for distressed sale. A Section 363(b) sale is typically faster to close and ensures smooth post-transaction business integration between the purchaser and acquired assets. Section 363 sale places less financial and operational burden on debtor's resources as the transaction does not require the blessing of debtor's creditors and other interested parties. On the other hand, sale consummated under a Chapter 11 reorganization plan may not be a plausible option in complex bankruptcy cases following the enhanced limitations introduced by BAPCPA. The paper further suggests that Section 363 offers substantial advantages over other transactions and may become the structure of choice for a bankruptcy sale. Thus we may expect an explosion in §363 sale in coming future.

Advertising by Consumer Bankruptcy Attorneys after BAPCPA

Section 528 of the Bankruptcy Code (Code), added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), requires that debt relief agencies disclose specified information in certain advertising directed to the general public. Many consumer bankruptcy attorneys have not yet attempted to comply with the advertising disclosure requirements in their Yellow Pages advertising or on their web sites and some attempts to comply fall short of the statutory requirements either for lack of required language or for failure to disclose the required information conspicuously. This article summarizes data in support of these conclusions, gathered from a review of advertising by consumer bankruptcy attorneys in fifty-one AT & T Yellow Pages directories published online after the April 2005 enactment of BAPCPA and from a review of some web sites to which some of those advertisements referred. This article also provides examples of complying, possibly complying, and non-complying advertisements, speculates about the possible reasons for non-compliance, discusses the possible consequences of non-compliance, and highlights some of the legal and practical issues posed by application of the statutory requirements to Yellow Pages and web site advertising. This article will first appear in the 2007 edition of Norton Annual Survey of Bankruptcy Law, published by Thomson/West, and this abstract is reproduced with the consent of the copyright holder, West Services, Inc.

Lessons from the Globalization of Consumer Bankruptcy

We live in an era of rapidly increasing internationalization and globalization. This certainly is true in the realm of economics, and to a somewhat lesser-but growing-extent in law.1 Until quite recently, though, the arcane arena of largely resisted the globalization pull, in both economics and in law. Perhaps to a surprising degree, the manner of dealing with the problem of overindebtedness was essentially and fundamentally parochial in nature. Historically, the systems of different nations have varied dramatically-if, indeed, a given country had such a system at all. In much of the world, indeed, the phrase consumer would have been an oxymoron: by definition and conception, bankruptcy is (or was) a legal mechanism to be used for business failures only. The quaint and moralistic notion was that only business people would need or be able to justify incurring debt. This limited usage was common also in Anglo-American jurisprudence until the middle of the 19th century, but then England and the United States expanded their conceptions of bankruptcy to embrace debt relief for nonbusiness individual debtors (Coleman 1974; McCoid

Consumer Bankruptcy: A Fresh Start

There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one’s debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules – while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

Consumer credit card use: The roles of creditor disclosure and anticipated emotion.

In response to federal legislative reform aimed, in part, at reducing consumer bankruptcy filings, the authors conducted 2 experiments examining the role of affect in purchasing behavior. In Experiment 1, they examined consumer debtors, and in Experiment 2, they examined nondebtors. In both experiments, they investigated purchasing decisions made during a simulated online shopping trip, with some participants receiving standard disclosures of interest rates and money owed and with other participants receiving information under the new enhanced disclosure regulations. Results demonstrated support for the influence of anticipated affect in credit card use among both debtors and nondebtors and indicated that anticipated emotion may moderate the impact of the enhanced disclosure regulations.

Consumer Bankruptcy: A Fresh Start

Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35)

Requirements and Prospects for a New Time to Payoff Disclosure for Open End Credit Under Truth in Lending

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8, April 2005) made significant changes to procedures for managing consumer bankruptcy petitions, but it also included amendments to the Truth in Lending Act. Notable among the Truth in Lending changes is a section providing for new disclosures on the length of time it will take consumers to repay open end credit accounts in full if they make only the minimum required payments. This paper explores the range of assumptions necessary for the calculations underlying the new required disclosures, examines the sensitivity of the disclosures to variations in the assumptions, and explores the potential for inaccuracy in the required disclosures based upon consumers' use of their open end credit accounts. For the latter exploration, the paper examines consumer survey evidence and employs a large longitudinal sample of credit card accounts to measure how often consumers' actual patterns of use of their credit card accounts match the assumptions of the new disclosure.

Priceless? Costs of Credit Card Merchant Restraints

Credit card transactions cost American merchants six times as much as cash transactions. American merchants paid nearly $40 billion to accept credit cards last year. Why, then, do consumers pay the same price for purchases, regardless of their means of payment? The answer lies in a set of credit card network rules known as merchant restraints. Merchant restraints forbid merchants from surcharging for credit and discounting for non-cash payments, while the framing effect, a well-documented cognitive bias, makes discounting for cash ineffective. Merchant restraints thus prevent merchants from pricing according to consumers' payment method and from signaling to consumers the costs of their choice of payment method. Accordingly, consumers never internalize the costs of their choice of payment system. Credit card merchant restraints lead to an over-consumption of credit, which has profound anticompetitive and social effects. This article examines how merchant restraints have distorted competition within the credit card industry and among payment systems in general. It also identifies several problematic social impacts of merchant restraints, including a regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers and increased use of credit leading to increased consumer bankruptcy filings, inflation, and decreased consumer purchasing power. The article contends that the economic justifications for merchant restraints are unfounded, that merchant restraints are better understood in the context of their historical development as a solution to a legal problem that no longer exists, and that merchant restraints are clear antitrust violations. Thus, the article proposes regulatory or judicial intervention to ban merchant restraint rules.

Consumer Bankruptcy Filings: Trends and Indicators

This paper examines consumer bankruptcy filing rates. It attempts to identify some trends and some economic indicators that might predict those filing rates. While several studies examined these questions prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), there remains considerable uncertainty and debate over what economic factors correlate to consumer bankruptcy. This is the first study that takes into account the impact of BAPCPA, both in anticipation of and in the aftermath of its effective date. 1. Part I lays out the historical filing rate data following the effective date of the Bankruptcy Reform Act of 1978. Part II examines the impact of BAPCPA on filing rates, and finds that the dramatic post-BAPCPA drop in filings may be almost over. Soon, consumer bankruptcy filing rates are likely to return to their pre-BAPCPA levels. Part III then analyzes the possible correlation of numerous plausible economic data sets to non-business bankruptcy filing rates. The paper finds several such data sets that correlate to non-business filings to a high level of statistical significance. These economic indicators point to a return to pre-BAPCPA filing levels. However, those indicators also suggest that it is unlikely that consumer filings will increase much over those old levels unless fundamental underlying economic changes occur. The findings in Part III further indicate that if Congress wants to curb consumer bankruptcy filings, it needs to focus on treating root causes - such as the explosion in revolving consumer credit - rather than on symptoms. Thus, BAPCPA may have been misguided

Consumer Bankruptcy: How Unsecured Lenders Fare

On September 8, 2003, the Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a workshop on consumer bankruptcy and its effect on unsecured lenders. Professor Melissa Jacoby of Temple University's School of Law led the workshop. A leading bankruptcy scholar, Jacoby described the current bankruptcy system and the potential impact of Chapter 7 reforms on the rights of unsecured creditors. This paper summarizes Jacoby's presentation and the ensuing discussion. It offers a brief overview of consumer bankruptcy and the rights of unsecured creditors that lend money to individuals who ultimately file for bankruptcy. It also discusses the proposed amendments to the bankruptcy code being debated in Congress. Finally, the paper concludes with Jacoby's assessment of how unsecured lenders, such as credit card issuers, would likely be treated in the proposed system.

Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer's incentives prior to distress and during a period of good conduct following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor's choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.

Consumer Bankruptcy Law Reform in Scotland, England and Wales

As is the case in several other jurisdictions, policymakers in the United Kingdom are seeking to adjust the bankruptcy laws to reflect ever increasing usage of the bankruptcy system by consumer debtors. This paper sketches the existing and emerging consumer bankruptcy systems in Scotland, England and Wales and seeks to assess the fitness for purpose of those systems.

Out With the New, in With the Old: as Sweden Aggressively Streamlines its Consumer Bankruptcy System, Have U.S. Reformers Fallen Off the Learning Curve?

Before the dust had settled on the complete overhaul of the U.S. consumer bankruptcy system in October 2005, Sweden remodeled its consumer bankruptcy law on May 19, 2006. After over a decade of trial and error under its 1994 original law, Sweden has just adopted a streamlined new law to make its system more straightforward and efficient. Of particular interest to U.S. readers, Sweden's original law functioned very much like the revised consumer bankruptcy system just adopted in the United States. U.S. policymakers should be aware of reforms in parallel systems, like that in Sweden, to avoid falling into the same traps that snared our European neighbors. For example, the failure and abandonment of mandatory credit counseling and informal negotiation with creditors in Sweden seems a likely harbinger of things inevitably to come in the U.S. In addition, Sweden has just ushered in an administrative structure that corresponds almost exactly with proposals that were rejected in the United States in the 1970s. Perhaps it is time to reconsider our rejection of these proposals, at least in part. This article examines the Swedish law in books and in action as part of an on-going project to chart - in English - the experiences of our European neighbors with new and developing consumer debt relief systems. In undertaking this project, I hope to encourage U.S. policymakers to climb back to the top of the increasingly international learning curve.

Requirements and Prospects for a New Time to Payoff Disclosure for Open End Credit Under Truth in Lending

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8, April 2005) made significant changes to procedures for managing consumer bankruptcy petitions, but it also included amendments to the Truth in Lending Act. Notable among the Truth in Lending changes is a section providing for new disclosures on the length of time it will take consumers to repay open end credit accounts in full if they make only the minimum required payments. This paper explores the range of assumptions necessary for the calculations underlying the new required disclosures, examines the sensitivity of the disclosures to variations in the assumptions, and explores the potential for inaccuracy in the required disclosures based upon consumers' use of their open end credit accounts. For the latter exploration, the paper examines consumer survey evidence and employs a large longitudinal sample of credit card accounts to measure how often consumers' actual patterns of use of their credit card accounts match the assumptions of the new disclosure.

The Paradox of Consumer Credit

Congress designed the 2005 amendments to the federal Bankruptcy Code to decrease consumer bankruptcy filings, but does history suggest that is a reasonable expectation for the new law? Using government data, this paper examines the relationship between household debt and changes in the legal regime on bankruptcy filing rates. First, I find that the components of household debt have different relationships with bankruptcy filing rates over different time frames. Over both the short- and long-term, increased mortgage debt is associated with increased bankruptcy filing rates. Consumer debt, however, has a negative short-term relationship with bankruptcy filing rates but a positive long-term relationship. A run up in consumer credit seems to allow consumers to delay but not avoid bankruptcy. The relationships were statistically meaningful and robust to different specifications of statistical models. Previous amendments to the federal bankruptcy law in 1938 and 1979 did not have any significant effect on bankruptcy filing rates. Rather, after each of these enactments, bankruptcy filings continued to move with overall macroeconomic trends unabated by changes in the legal regime. The 1984 amendments, however, were associated with an increase in filing rates, a rather surprising result given that the 1984 amendments - like the 2005 amendments - were meant to crack down on perceived overly generous bankruptcy laws. Others have noted that the 1984 amendments were followed by an expansion of consumer credit, which the other findings suggest are associated with a long-term increase in the filing rate. Taken together, these findings suggest the 2005 amendments may similarly lead to an expansion of consumer credit and a long-term increase in the bankruptcy filing rate.

Less Stigma or More Financial Distress: An Empirical Analysis of the Extraordinary Increase in Bankruptcy Filings

A central concern in domestic economic policy has been the great increase in consumer bankruptcy filings since 1980. That concern was a major cause of the adoption of the 2005 amendments to the Bankruptcy Code. We analyze the data from three studies of consumer bankruptcy over twenty years to learn more about the causes of that increase. One consistent claim has been that a decline in reputational loss (stigma) has made filing for bankruptcy easier, thus explaining the rise in filings. The principal competing claim has been that increased filings arise from increased financial distress. We find that the declining-stigma hypothesis is implausible because the data show that consumer bankrupts are even more indebted now than their counterparts were in 1981 and 1991 and that there is no identifiable group of less-indebted bankrupts that were tempted into bankruptcy by reduced reputational costs. Those data and other factors support an inference that the stigma of bankruptcy may have increased over the past twenty years.

U.S. consumer bankruptcy choice: The importance of general equilibrium effects

We study the implications of U.S. personal bankruptcy rules for resource allocation and welfare. Our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform. Contrary to previous work, we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input. Furthermore, subjecting Chapter 7 filers to means testing, as suggested by recent legislative proposals, would not improve upon current bankruptcy provisions and, at best, leave aggregate filings, output, and welfare unchanged. However, we do find that an alternative tightening of Chapter 7, in the form of lower asset exemptions, can increase economic efficiency.

Functionalism and Political Economy in the Comparative Study of Consumer Insolvency: An Unfinished Story from England and Wales

This Article is made up of two parts. The first part reflects on the dominant functionalist approach to comparative consumer bankruptcy and suggests that this might be supplemented by a political economy analysis that addresses the role of national and international interest groups, including professionals, and ideology in understanding different national responses to overindebtedness in North America and Europe. The second part examines current reforms to consumer bankruptcy and responses to overindebtedness in the UK through this political economy lens and concludes that competition among professional groups, the role and interests of the Insolvency Service, and the ideology of the Third Way in consumer policy will influence the ultimate structure adopted for addressing consumer insolvency. A study of the English experience suggests that there is also an element of national path dependency to consumer insolvency reform that may resist pressures towards convergence of approaches between countries in addressing issues of consumer insolvency.