Ebook Household Borrowing after Personal Bankruptcy
A cornerstone of the U.S. consumer credit markets is the personal bankruptcy law, which aims to provide a “fresh start” to distressed debtors through debt discharge. Amid the fast growth of consumer credit in the past two decades, the number of households that have sought bankruptcy protection has also increased dramatically in the United States, with the annual rate of personal bankruptcy filings rising from 3.6 filings per thousand households in 1980 to nearly 14 in 2004. Such a rapid rise has motivated an extensive literature searching for the causes of personal bankruptcy filing. Most of the existing literature, however, focuses squarely on the prepetition conditions and financial market evolutions and pays little attention to household financial conditions post bankruptcy. This is somewhat surprising because what happens to postbankruptcy borrowing should affect the filing decision in the first place. In addition, studying postbankruptcy financial well being is critical to evaluating the effectiveness of the law. Moreover, with little empirical evidence documented as guidance, the existing dynamic equilibrium models with bankruptcy features may not have been realistically calibrated.
In this paper, we seek to address this void by providing a comprehensive analysis on house hold borrowing after personal bankruptcy filing. Using data from the Survey of Consumer Finances (SCF), we examine the differences in the use of credit between those households who have ever filed for bankruptcy and those who have never filed, hereafter “filers” and “nonfilers”, respectively. In addition, we study how the effects of bankruptcy filing vary with time passed since the last filing, hereafter “time since filing”. Specifically, for each of the three major debt categories credit card debt, first lien home mortgages, and vehicle loans we try to answer the following questions: Is it less likely for filers to take on such debt than comparable nonfilers? Conditional on having the access, do filers borrow less or pay a higher interest rate? Are filers more likely to experience renewed debt payment difficulties? How do these effects change with the staleness and the removal of a bankruptcy record from credit reports?
We find that without controlling for time since filing, filers generally have less access to unsecured revolving credit than comparable nonfilers but borrow more on mortgages and vehicle loans. Relative to comparable nonfilers, an average filer is about 50 percent less likely to obtain a credit card and, conditional on having a card, has a credit limit that is almost $8000 lower. In contrast, filers have a similar likelihood of obtaining a mortgage, and their mortgages have only slightly higher loan-to-value ratios at the origination. Filers are also 28 percent more likely to obtain a vehicle loan, but they have similar size of loans relative to their income. Finally, filers generally pay significantly higher interest rates on all three types of loans than comparable nonfilers.
The effects of bankruptcy filing also depend on whether the bankruptcy filing record appears on credit reports. The Fair Credit Reporting Act requires that credit bureaus remove a bankruptcy record from credit reports ten years after a filing. We find that, for households who filed for bankruptcy fewer than nine years previously those whose filing records remain on their credit reports the effects of filing on credit card debt and vehicle loans are similar to the general results stated above, but the effects on first lien mortgages vary considerably with time since filing. Relative to comparable nonfilers, households who filed more than nine years earlier those whose filing records no longer appear on their credit reports have similar or higher likelihood of having each of the three types of loans, carry higher balances or leverages, but do not necessarily pay higher interest rates.
Despite the reduced form nature of our estimations, we attempt to infer through which channel, demand or supply of credit, the bankruptcy filing affects post bankruptcy borrowing. We make such inference based on the joint predictions of standard price theory on the changes in both equilibrium debt quantity and interest rate. This approach allows us to make the following claims: First, households who filed for bankruptcy fewer than nine years earlier face a lower supply of credit card credit than comparable nonfilers, but they have stronger demand for vehicle loans. Second, relative to comparable nonfilers, households who filed more than nine years earlier have stronger demand for all three types of credit. This stronger demand is possibly due to the fact that filers may have deliberately deferred their loan requests until the tenth anniversary, because after that they can get better deals when their credit scores artificially improved with the removal of the bankruptcy flag.
Our analysis also reveals that filers continued to experience debt payment difficulties and accumulate less wealth post bankruptcy. Relative to comparable nonfilers, filers are generally about 30 percent more likely to have fallen behind on their debt payment schedules, and they have substantially lower net worth, even many years after their last filings. The persistent financial distress and low wealth accumulation among filers suggest that, for many bankrupt households, debt discharge fails to generate an effective fresh start as intended by the law.
This paper contributes to three strands of literature. First, our comprehensive analysis extends significantly the limited studies on household borrowing and financial well being post bankruptcy. Previous studies suggest that households may still be able to borrow, in part because advances informational technology and financial innovations allow lenders to better screen, monitor, and price loans. Our analysis goes beyond these studies by providing quantitative evidence on both quantity and prices of postbankruptcy borrowing in major consumer debt categories. Second, our findings provide a benchmark for the calibration of theoretical models of personal bankruptcy and credit constraints. In recent years, a growing literature has used dynamic equilibrium models to study various positive and normative aspects of personal bankruptcy. With little empirical guidance from the existing literature, these theoretical models impose various assumptions about postbankruptcy credit access, instead of calibrating the models directly using data on actual credit use. Third, our paper contributes to the growing literature on the impact of filing for personal bankruptcy on consumer behavior. Existing empirical studies have looked into the effects of filings for personal bankruptcy on homeownership, consumption, and labor supply. Our paper complements these studies and provides further evidence about the costs of filing for personal bankruptcy.
The rest of the paper is organized as follows. Section 2 reviews the relevant legislation, theory, and literature; Section 3 describes our data and discusses methodological issues; Sections 4 and 5 present, respectively, descriptive and regression results on postbankruptcy borrowing; Section 6 examines debt delinquency and wealth accumulation after bankruptcy filing; and Section 7 concludes and discusses directions for future research.
Download
PDF Ebook Household Borrowing after Personal Bankruptcy
Posted in :
