Todd J. Zywicki Professor of Law George Mason University Law School

1. 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. Zywicki Professor of Law George Mason University Law School Research Fellow, James Buchanan Center

2. 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

3. The Challenge

4. 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

5. Rise of Traditional Model

6. The Bankruptcy Crisis

7. “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

8. 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

9. Cash Flow Insolvency Source: Administrative Office of U.S. Courts, Federal Reserve

10. Bankruptcy Insolvency Source: Federal Reserve

11. Bankruptcy Insolvency

12. Changes in Net Worth

13. Credit Cards Source: Federal Reserve and Bureau of Economic Analysis

14. Credit Cards

15. Substitution Effect

16. Substitution Effect

17. Substitution Effect

18. Mortgages

19. The Housing “Bidding War”(From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)

20. “Bidding War”?(From Warren & Tiyagi, The Two-Income Trap, pp. 50-51)

21. Mortgages and Home Ownership

22. Financial Shocks • Unemployment • Downsizing • Divorce

23. Unemployment? Source: Bureau of Labor Statistics and Administrative Office of U.S. Courts

24. Downsizing? Source: David Gordon, Fat and Mean (1994).

25. Divorce? Source: Bureau of Census and Administrative Office of U.S. Courts

26. 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?

27. 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

28. A New Institutional Economics Model of Consumer Bankruptcy Three Hypotheses About the Causes of the Consumer Bankruptcy Crisis: • Change in the Relative Economic Costs and Benefits of Filing Bankruptcy • Changes in Social Norms (“Stigma”) and Personal Attitudes Regarding Bankruptcy • Changes in the Nature of Consumer Credit: Impersonalization and Nationalization of Consumer Credit

29. Goals of BAPCPA: Preserve Fresh Start • Preserve Relief for Those Who Need It • Flexibility: Hurricane Katrina • Effects on Domestic Support Obligations

30. Delinquencies on Consumer Loans

31. Reduce Fraud and Abuse • Anti-Fraud Protections • Anti-Abuse Provisions • Involuntary Creditors: Domestic Support • Repeat Filings • Credit Counseling • Changing Social Norms?