Presentation on theme: "The Causes and Consequences of BAPCPA Adapted from Todd J. Zywicki, Bankruptcy and Personal Responsibility: Consumer Bankruptcy Law and Policy in the Twenty-First."— Presentation transcript:
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
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
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
Rise of Traditional Model
The Bankruptcy Crisis
“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
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
Cash Flow Insolvency Source: Administrative Office of U.S. Courts, Federal Reserve
Bankruptcy Insolvency Source: Federal Reserve
Changes in Net Worth
Credit Cards Source: Federal Reserve and Bureau of Economic Analysis
The Housing “Bidding War” (From Warren & Tiyagi, The Two-Income Trap, pp )
Unemployment? Source: Bureau of Labor Statistics and Administrative Office of U.S. Courts
Downsizing? Source: David Gordon, Fat and Mean (1994).
Divorce? Source: Bureau of Census and Administrative Office of U.S. Courts
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?
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
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
Goals of BAPCPA: Preserve Fresh Start Preserve Relief for Those Who Need It Flexibility: Hurricane Katrina Effects on Domestic Support Obligations
Delinquencies on Consumer Loans
Reduce Fraud and Abuse Anti-Fraud Protections Anti-Abuse Provisions Involuntary Creditors: Domestic Support Repeat Filings Credit Counseling Changing Social Norms?