The Causes and
Consequences of BAPCPA
Adapted from Todd J. Zywicki, Bankruptcy and Personal
Responsibility: Consumer Bankruptcy Law and Policy in the TwentyFirst 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
19
00
19
05
19
10
19
15
19
20
19
25
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
Bankruptcy Filings per 100,000 Pop
The Challenge
Bankruptcy Filings per 100,000 Population
600
500
400
300
200
100
0
Year
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
Figure 1: Bankruptcy Filings, 1900-1950
Bankrutpcy Filings per 10,000 Pop
60
50
40
30
20
10
0
00
19
04
19
08
19
12
19
16
19
20
19
24
19
28
19
Year
32
19
36
19
40
19
44
19
48
19
The Bankruptcy Crisis
Nonbusiness Filings per 1000 Households
20
16
14
12
10
8
6
4
2
Year
20
02
19
97
19
92
19
87
19
82
19
77
19
72
19
67
19
62
19
57
19
52
0
19
47
Filings per 1000 Households
18
“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
Debt Service Ratio by Type of Debt: 1980-2006
Proportion of Income
0.14
0.12
0.1
Nonrevolving DSR
Revolving DSR
0.08
Mortgage DSR
0.06
Total DSR
0.04
0.02
20
02
q3
19
98
q4
19
95
q1
19
91
q2
19
87
q3
19
83
q4
19
80
q1
0
Year
Source: Administrative Office of U.S. Courts, Federal Reserve
Bankruptcy Insolvency
Household Net Worth
Net Worth (Billions)
60000
50000
40000
30000
20000
10000
0
1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2
-Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q -Q
52 9 54 9 57 9 60 9 63 9 65 9 68 9 71 9 74 9 76 9 79 9 82 9 85 9 87 9 90 9 93 9 96 9 98 0 01 0 04
9
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
Year
Source: Federal Reserve
Bankruptcy Insolvency
100
500
90
450
80
400
70
350
60
300
50
250
40
200
30
150
20
100
10
50
0
0
1989
1992
1995
1998
Year
2001
2004
Mean Net Worth
Median Net Worth
Household Net Worth
Median
Household Net
Worth
Mean Household
Net Worth
Changes in Net Worth
Median Net Worth by Income Ranges
Net Worth (in Thousands)
1000
900
Median Net Worth All
Households
800
Lowest Quintile
700
Second Quintile
600
500
Third Quintile
400
Fourth Quintile
300
200
80-89.9%
100
90-100%
0
1989
1992
1995
1998
2001
2004
Credit Cards
Nonmortgage DSR
0.075
Proportion of Income
0.07
0.065
0.06
0.055
0.05
Year
Source: Federal Reserve and Bureau of Economic Analysis
20
04
q1
20
01
q1
19
98
q1
19
95
q1
19
92
q1
19
89
q1
19
86
q1
19
83
q1
19
80
q1
0.045
Credit Cards
Non-Mortgage DSR
0.08
0.06
0.05
0.04
Non-Revolving
Plus Revolving
0.03
Nonrevolving DSR
0.02
0.01
Revolving DSR
Year
20
02
q3
19
98
q4
19
95
q1
19
91
q2
19
87
q3
19
83
q4
0
19
80
q1
Proportion of Income
0.07
Substitution Effect
Consumer Interest Rates, Washington DC, August 25, 2006
11
10
Interest Rate
9
8
7
6
5
Personal Loan
Credit Cards
Home Equity Loan
New Car Loan
Substitution Effect
Substitution Effect
Mortgages
Mortgage Debt Service Ratio
0.08
0.075
0.07
0.065
0.06
0.055
0.05
0.045
Year
20
05
q1
20
02
q3
20
00
q1
19
97
q3
19
95
q1
19
92
q3
19
90
q1
19
87
q3
19
85
q1
19
82
q3
19
80
q1
0.04
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%
Discretionary,
17834, 46%
Automobile, 5140,
13%
Taxes, 9288, 24%
“Bidding War”?
(From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)
Figure 9: Dual-Income Family, Early 2000s
(Total Income=$67,800)
Child Care, 9670,
14%
Health Ins., 1650,
2%
Mortgage, 9000,
13%
Automobile, 8000,
12%
Discretionary,
17045, 25%
Taxes, 22374, 34%
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
Mortgages and Home Ownership
Home Ownership Percentage
70
69
68
67
66
65
64
63
62
Financial Shocks
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

Unemployment
Downsizing
Divorce
Unemployment?
Figure 10: Unemployment and Bankruptcy
12
14
10
12
8
10
8
6
6
4
Unemployment Rate
Bankruptcies per 1,000 Families
16
4
2
2
0
0
47 9 52 9 57 9 62 9 67 9 72 9 77 9 82 9 87 9 92 9 97 0 02
19
1
1
1
1
1
1
1
1
1
1
2
Year
Source: Bureau of Labor Statistics and Administrative Office of U.S. Courts
Bankruptcies per
1,000 Families
Unemployment
Rate
Downsizing?
Managers as Percent Nonfarm Employment
Figure 11: Managers as Percent of Employment, 1948-94
20
19
18
17
16
15
14
13
12
11
48 9 51 9 54 9 57 9 60 9 63 9 66 9 69 9 72 9 75 9 78 9 81 9 84 9 87 9 90 9 93
19
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Year
Source: David Gordon, Fat and Mean (1994).
Divorce?
Figure 12: Divorce and Bankruptcy
6
14
5
12
4
10
8
3
6
2
4
1
2
0
0
47 52 57 62 67 72 77 82 87 92 97 02
19 19 19 19 19 19 19 19 19 19 19 20
Year
Source: Bureau of Census and Administrative Office of U.S. Courts
Divorce Rate/1,000 Households
Bankruptcies per 1,000 Families
16
Bankruptcies per
1,000 Households
Divorce Rate per
1,000 Households
The Traditional Model: Appraisal


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

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
Consumer Loan Delinquencies
6
4
Credit Card
Delinquencies
3
Other Consumer
Loan
Delinquencies
2
1
Year
20
05
Q
1
20
01
Q
1
20
03
Q
1
19
95
Q
1
19
97
Q
1
19
99
Q
1
0
19
91
Q
1
19
93
Q
1
Percent Delinquent
5
Reduce Fraud and Abuse

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Anti-Fraud Protections
Anti-Abuse Provisions
Involuntary Creditors: Domestic Support
Repeat Filings
Credit Counseling
Changing Social Norms?