Todd J. Zywicki Professor of Law George Mason University Law School
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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
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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 - PowerPoint PPT Presentation
Transcript of Todd J. Zywicki Professor of Law George Mason University Law School
The Causes and Consequences of BAPCPAAdapted 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. ZywickiProfessor of LawGeorge Mason University Law SchoolResearch 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 ChallengeBankruptcy Filings per 100,000 Population
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100
200
300
400
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600
Year
Ban
krup
tcy
Filin
gs p
er 1
00,0
00 P
op
The Traditional ModelHypothesis: 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 ModelFigure 1: Bankruptcy Filings, 1900-1950
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Ban
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The Bankruptcy CrisisNonbusiness Filings per 1000 Households
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Hou
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“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
Debt Service Ratio by Type of Debt: 1980-2006
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Year
Pro
port
ion
of In
com
e
Nonrevolving DSR
Revolving DSR
Mortgage DSR
Total DSR
Bankruptcy Insolvency
Source: Federal Reserve
Household Net Worth
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10000
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60000
Year
Net
Wor
th (B
illio
ns)
Bankruptcy Insolvency
Household Net Worth
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1989 1992 1995 1998 2001 2004
Year
Med
ian
Net
Wor
th
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450
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Mea
n N
et W
orth Median
Household NetWorth
Mean HouseholdNet Worth
Changes in Net WorthMedian Net Worth by Income Ranges
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1989 1992 1995 1998 2001 2004
Net
Wor
th (i
n Th
ousa
nds)
Median Net Worth AllHouseholds
Lowest Quintile
Second Quintile
Third Quintile
Fourth Quintile
80-89.9%
90-100%
Credit Cards
Source: Federal Reserve and Bureau of Economic Analysis
Nonmortgage DSR
0.045
0.05
0.055
0.06
0.065
0.07
0.075
Year
Pro
port
ion
of In
com
e
Credit CardsNon-Mortgage DSR
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0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Year
Pro
port
ion
of In
com
e
Non-RevolvingPlus Revolving
Nonrevolving DSR
Revolving DSR
Substitution EffectConsumer Interest Rates, Washington DC, August 25, 2006
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6
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Personal Loan Credit Cards Home Equity Loan New Car Loan
Inte
rest
Rat
e
Substitution Effect
Substitution Effect
MortgagesMortgage Debt Service Ratio
0.04
0.045
0.05
0.055
0.06
0.065
0.07
0.075
0.08
Year
The Housing “Bidding War”(From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)
Figure 8: Single-Income Family, Early 1970s(Total Income=$38,700)
Health Ins., 1030, 3%
Mortgage, 5310, 14%
Automobile, 5140, 13%
Taxes, 9288, 24%
Discretionary, 17834, 46%
“Bidding War”?(From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)
Figure 9: Dual-Income Family, Early 2000s(Total Income=$67,800)
Health Ins., 1650, 2%
Mortgage, 9000, 13%
Automobile, 8000, 12%
Taxes, 22374, 34%
Discretionary, 17045, 25%
Child Care, 9670, 14%
Mortgages and Home OwnershipHome Ownership Percentage
62
63
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70
Financial Shocks
Unemployment Downsizing Divorce
Unemployment?
Source: Bureau of Labor Statistics and Administrative Office of U.S. Courts
Figure 10: Unemployment and Bankruptcy
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Ban
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s per
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Une
mpl
oym
ent R
ate
Bankruptcies per1,000 Families
UnemploymentRate
Downsizing?Figure 11: Managers as Percent of Employment, 1948-94
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Year
Man
ager
s as P
erce
nt N
onfa
rm E
mpl
oym
ent
Source: David Gordon, Fat and Mean (1994).
Divorce?
Source: Bureau of Census and Administrative Office of U.S. Courts
Figure 12: Divorce and Bankruptcy
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Div
orce
Rat
e/1,
000
Hou
seho
lds
Bankruptcies per1,000 Households
Divorce Rate per1,000 Households
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 BankruptcyThree Hypotheses About the Causes of the
Consumer Bankruptcy Crisis:1. Change in the Relative Economic Costs and
Benefits of Filing Bankruptcy2. Changes in Social Norms (“Stigma”) and
Personal Attitudes Regarding Bankruptcy3. 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 Consumer Loan Delinquencies
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1
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6
Year
Per
cent
Del
inqu
ent
Credit CardDelinquencies
Other ConsumerLoanDelinquencies
Reduce Fraud and Abuse
Anti-Fraud Protections Anti-Abuse Provisions Involuntary Creditors: Domestic Support Repeat Filings Credit Counseling Changing Social Norms?
