New report explores trends in consumer bankruptcy
Today the Consumer Financial Protection Bureau (Bureau) released the latest quarterly consumer credit trends report (qCCT), which describes how the volume and types of bankruptcy filings have changed throughout the period 2001 – 2018, which includes the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and the Great Recession.
Understanding how the bankruptcy system is being used and by whom is important because of the role bankruptcy can play in helping consumers recover from financial shocks, the relationship between bankruptcy and debt collection, and the effect the system can have on the cost and availability of credit.
This report analyzes data from the Bureau’s Consumer Credit Panel (CCP), a longitudinal, nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies. The report focuses on consumers who filed for Chapter 7 or Chapter 13 bankruptcy between 2001 and 2018. Under a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated in order to repay creditors and the remaining debt is generally discharged. Under a Chapter 13 bankruptcy, debtors enter into a repayment plan to repay a portion of their debt.
Key findings include:
- From 2001 – 2004 about 75 percent of personal bankruptcy filers used Chapter 7. BAPCPA, which took effect in October 2005, restricted access to Chapter 7 by establishing a means test for those with income above a certain limit. This created a rush to file before BAPCPA took effect and increased the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings in 2005. In 2015 – 2018, with the effects of the Great Recession fading, Chapter 7 filings appear to have stabilized at about 63 percent of personal bankruptcy filings.
- Bankruptcy petitions generally result in a discharge or dismissal. A dismissal occurs when the debtor does not meet the requirements set by the court. Nearly all Chapter 7 filings result in a discharge of debt, which takes about four months. Less than half of Chapter 13 filers complete their repayment plans and receive a discharge.
- Median credit scores of Chapter 7 and 13 filers one year prior to filing increased after BAPCPA but declined starting in 2010 possibly because filers experienced a negative financial shock during the Great Recession which lowered credit scores.
- On average, Chapter 7 and 13 filers had more than twice the mortgage debt during the Great Recession than in the periods before and after. This is consistent with the financial shock of the recession causing more homeowners to file for bankruptcy.
- Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition. Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings. Both Chapter 7 and 13 filers who filed in 2001 – 2004 received a second shock in the form of the Great Recession which slowed the recovery in median credit scores.