Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection

By: Will Dobbie and Jae Song. Published by: National Bureau of Economic Research. Published in 2014

Link to article

The abstract reads:

“Consumer bankruptcy is one of the largest social insurance programs in the United States, but little is known about its impact on debtors. We use 500,000 bankruptcy filings matched to administrative tax and foreclosure data to estimate the impact of Chapter 13 bankruptcy protection on subsequent outcomes. Exploiting the random assignment of bankruptcy filings to judges, we find that Chapter 13 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. These results come primarily from the deterioration of outcomes among dismissed filers, not gains by granted filers.”


“In this paper, we use a new dataset linking 500,000 bankruptcy filings to administrative tax records from the Social Security Administration (SSA) and administrative foreclosure records to estimate the causal effect of Chapter 13 bankruptcy protection on subsequent earnings, mortality, and home foreclosure. Our empirical strategy exploits the fact that most U.S. bankruptcy courts use a blind rotation system to assign cases to judges, effectively randomizing filers to judges within each office.” (p. 1-2).


“In our empirical analysis, we find compelling evidence that Chapter 13 bankruptcy protection benefits debtors. Over the first five post-filing years, Chapter 13 protection increases the marginal recipient’s annual earnings by $5,562, a 25.1 percent increase from the pre-filing mean. Employment increases by 6.8 percentage points over the same time period, an 8.3 percent increase. Five-year mortality decreases by 1.2 percentage points, a 30.0 percent decrease from the dismissed filer mortality rate, and five-year home foreclosure rates decrease by 19.1 percentage points, a more than 100 percent decrease from the dismissed filer foreclosure rate. There is also evidence that Chapter 13 protection deceases the receipt of Supplemental Security Income (SSI), although there is little to no impact on 401k contributions and the receipt of Disability Insurance (DI). Descriptive results suggest that the estimated impacts come from the deterioration of outcomes among dismissed filers, not gains by granted filers. Filers granted bankruptcy protection have similar pre- and post-filing earnings. In contrast, dismissed filers experience large and persistent drops in earnings after filing for bankruptcy.” (p. 2)

Categories: Consumer, Consumer/finance, Consumers, Legal Aid Attorneys, National, Researchers and Academics, Victims of Crime

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