Bankruptcy as Social Insurance Program

Posted by NCBRC - October 1, 2014

Fortune Magazine reported yesterday on the results of a recent study conducted by the National Bureau of Economic Research in which the NBER examined 500,000 U.S. bankruptcy filings to determine the overall effect on consumers. The study found that Chapter 13 bankruptcy protection “increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, and decreases five-year foreclosure rates by 19.1 percentage points.” The authors of the NBER paper, Will Dobbie and Jae Song, speculated that chapter 13 bankruptcy removed the disincentive to work that creditor wage garnishment may have. Additionally, by proactively dealing with overwhelming debt, the chapter 13 debtor is relieved of financial problems that may lead to life-shortening stress.

The Fortune article goes on to discuss the conventional wisdom behind passage of BAPCPA, that bankruptcy is the escape route of the profligate and has a negative effect on responsible consumers by increasing borrowing costs. In response to this line of thinking, Fortune notes a 2008 study reported in the American Bankruptcy Law Journal in which, while the hurdles to bankruptcy created by BAPCPA did result in fewer bankruptcy filings and increased credit card company profits, the costs to credit card debtors increased as well.

The article concludes that “[s]ince tightening standards for declaring bankruptcy hasn’t lowered borrowing costs for the rest of us, loosening standards—especially for student loan debt—could help relieve financial pressure for the lower and middle classes. Dobbie and Song’s findings also provide further evidence that helping underwater borrowers modify their mortgages could provide huge benefits for those people, and the economy overall.”


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