1. The Causes and Consequences of BAPCPA Adapted from Todd J. Zywicki, Bankruptcy and Personal Responsibility: Consumer Bankruptcy Law and Policy in the Twenty-First Century (Forthcoming 2007, Yale University Press) Todd J. Zywicki Professor of Law George Mason University Law School Research Fellow, James Buchanan Center

2. Overview Traditional Model: Consensus Since 1950s Traditional Model Accounts for “Background” Level of Bankruptcies: National and Regional Does Traditional Model Explain Upward Trend of Past 25 Years? A New Model? BAPCPA

3. The Challenge

4. The Traditional Model Hypothesis: Bankruptcy Results from Household Financial Distress  Heavy Indebtedness and/or  An Unexpected Expense or Income Shock to Household Budget  Unemployment or Downsizing  Divorce  Health

5. Rise of Traditional Model

6. The Bankruptcy Crisis

7. “Debt Causes Bankruptcy” Thesis Douglas Baird: “Bankruptcy filings... are affected most by the amount of debt individuals carry relative to their annual income.... The higher this ratio the more likely individuals will be unable to pay their debts if they encounter economic misfortune.” Elizabeth Warren: “The macrodata are unambiguous about the best predictor for consumer bankruptcy. Consumer bankruptcy filings rise and fall with the levels of consumer debt.... The simple explanation of the rise in filings—bankruptcies rise as household debt rises—is undeniable.” Theoretical Questions: Endogeneity Empirical Questions

8. Debt and Bankruptcy  Equity/“Cash Flow” Insolvency: Ability to Pay Debts as they Come Due (Flow Measure)  Liquidation/Bankruptcy Insolvency: Ratio of Total Assets to Total Debt at Liquidation (Stock Measure)  Credit Cards

9. Cash Flow Insolvency Source: Administrative Office of U.S. Courts, Federal Reserve

10. Bankruptcy Insolvency Source: Federal Reserve

11. Bankruptcy Insolvency

12. Changes in Net Worth

13. Credit Cards Source: Federal Reserve and Bureau of Economic Analysis

14. Credit Cards

15. Substitution Effect

18. Mortgages

19. The Housing “Bidding War” (From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)

20. “Bidding War”? (From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)

21. Mortgages and Home Ownership

22. Financial Shocks Unemployment Downsizing Divorce

23. Unemployment? Source: Bureau of Labor Statistics and Administrative Office of U.S. Courts

24. Downsizing? Source: David Gordon, Fat and Mean (1994).

25. Divorce? Source: Bureau of Census and Administrative Office of U.S. Courts

26. The Traditional Model: Appraisal Traditional Hypothesis: Increase in Bankruptcy Filings Caused by Increase in Financial Distress Financial Condition? Financial Shocks? Traditional Model: Background Rate and Variation Around Trend Trend of Past 25 Years?

27. Institutions, Incentives, and The Consumer Bankruptcy Crisis  Hypothesis: Financial Distress has Not Increased, but Propensity to File Bankruptcy In Response to Financial Distress Has Institutions and Incentives of Consumer Bankruptcy System

28. A New Institutional Economics Model of Consumer Bankruptcy Three Hypotheses About the Causes of the Consumer Bankruptcy Crisis: 1. Change in the Relative Economic Costs and Benefits of Filing Bankruptcy 2. Changes in Social Norms (“Stigma”) and Personal Attitudes Regarding Bankruptcy 3. Changes in the Nature of Consumer Credit: Impersonalization and Nationalization of Consumer Credit

29. Goals of BAPCPA: Preserve Fresh Start Preserve Relief for Those Who Need It Flexibility: Hurricane Katrina Effects on Domestic Support Obligations

30. Delinquencies on Consumer Loans

31. Reduce Fraud and Abuse Anti-Fraud Protections Anti-Abuse Provisions Involuntary Creditors: Domestic Support Repeat Filings Credit Counseling Changing Social Norms?