Fed Forum Personal Bankruptcy Reform of 2005: Means-Testing or - - PowerPoint PPT Presentation

Fed Forum

Personal Bankruptcy Reform of 2005: Means-Testing or Mean-Spirited? Astrid Dick

Economist, Banking Studies Function Federal Reserve Bank of New York

March 8, 2007

BAPCPA and means BAPCPA and means-

• test

test

• Under old law…

Under old law…

• All filers eligible for Chapter 7

All filers eligible for Chapter 7

• Liquidation of

Liquidation of nonexempt

nonexempt assets

assets

• But remaining unsecured debt

But remaining unsecured debt discharged

discharged

• Under new law…

Under new law…

• Filers with income > state median may be

Filers with income > state median may be forced into Chapter 13 forced into Chapter 13

• Keep all assets

Keep all assets

• But must repay most of debt over next five years

But must repay most of debt over next five years

Rapid increase in bankruptcy filings Rapid increase in bankruptcy filings

Annual Consumer Bankruptcy Filings Per 1,000 households

2 4 6 8 1 1 2 1 4 1 6 1 8 20 1 947 1 952 1 957 1 962 1 967 1 972 1 977 1 982 1 987 1 992 1 997 2002

S

• ur ce: Adm

inistr ative Of f ice of the U.S . Cour ts; Am er ican Bankr uptcy Institute

BRA ’78 BAPCPA ’05

I s average Joe worse off? I s average Joe worse off?

• Decrease in insurance against bad luck

Decrease in insurance against bad luck

“America is…likely to turn into a “America is…likely to turn into a debt debt-

• peonage society”

peonage society”

Paul Paul Krugman Krugman, NYT, March 8, 2005 , NYT, March 8, 2005

BAPCPA has upside BAPCPA has upside

• Increased creditor protection lowers

Increased creditor protection lowers creditors’ costs creditors’ costs

• With sufficient competition, savings get

With sufficient competition, savings get passed on to borrowers passed on to borrowers

• Over $30 billion written off every year

Over $30 billion written off every year

• Curb strategic filings by irresponsible

Curb strategic filings by irresponsible borrowers borrowers

Evidence on strategic filing Evidence on strategic filing

• Reduced stigma

Reduced stigma

• Forum shopping: consumers move to high

Forum shopping: consumers move to high exemption states before filing exemption states before filing

• Financial incentives are main driver in

Financial incentives are main driver in decision to file decision to file

Rush to file Rush to file

Bankruptcy filings per week

100,000 200,000 300,000 400,000 500,000 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Week of Year

2005 2001-2004

Higher rush in higher exemption states Higher rush in higher exemption states

MD GA OH SC IN IL DE MO KY TN AL AR NC NY WV NE ME WY VA OR UT MI NJ DC PA CO ID HI NH WA WI LA NM AZ CA MA AK MT MS VT ND RI CT NV MN

20 40 60 80 100 100 200 300 400 500 Homestead exemption ($000s)

2005q4 over 2005q3

Percent Change in Chapter 7 Filings

Strategic filings restrict access to Strategic filings restrict access to credit and increase costs credit and increase costs

• More likely to be turned down for credit in

More likely to be turned down for credit in high exemption states high exemption states

• Higher APRs in high exemption states

Higher APRs in high exemption states

• Countries with more creditor protection

Countries with more creditor protection have greater private debt/GDP ratios have greater private debt/GDP ratios

• BAPCPA reduces strategic filings

BAPCPA reduces strategic filings

lower

lower costs of credit costs of credit

• Without it, lower creditor costs are not

Without it, lower creditor costs are not passed on to consumers passed on to consumers

• Doubts…

Doubts…

• Credit card interest rates sticky

Credit card interest rates sticky

• High profits

High profits

• Complex pricing may confuse consumers about

Complex pricing may confuse consumers about true cost true cost

• Creditors gain with BAPCPA passage

Creditors gain with BAPCPA passage

Credit card competition is crucial Credit card competition is crucial

Costs of credit have not fallen yet… Costs of credit have not fallen yet…

Spreads and Charge-offs Credit Card Asset-Backed Securities

2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00

May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06

Percent of Portfolio Par

BAPCPA ‘05

… …but they may: spreads rise and fall but they may: spreads rise and fall with charge with charge-

• offs
• ffs

5 10 15

1 9 8 5 q 1 1 9 9 q 1 1 9 9 5 q 1 2 q 1 2 5 q 1

Percentage points

spread xoffs

2006q3

Potential downsides from BAPCPA Potential downsides from BAPCPA

BAPCPA BAPCPA

• reduces insurance

reduces insurance

• Half of filers cite medical causes

Half of filers cite medical causes

• reduces entrepreneurship

reduces entrepreneurship

• reduces labor supply?

reduces labor supply?