Debt relief and debtor outcomes: Measuring the effects of consumer bankruptcy protection

Consumer bankruptcy is one the largest social insurance programs in the United States, but little is known about its impact on debtors. In this paper, we use a new dataset linking 500,000 bankruptcy filings with administrative tax records to estimate the impact of Chapter 13 bankruptcy protection – which provides debt relief and asset protection in exchange for a partial repayment of debt – on subsequent earnings and mortality. Our empirical strategy exploits the fact that U.S. bankruptcy courts use a blind rotation system to assign cases to judges, effectively randomizing filings to judges. Using differences in judge discharge rates as an instrumental variable, we are able to identify the impact of bankruptcy protection on the marginal recipient. We find that Chapter 13 protection increases annual earnings in the first five post-filing years by $5,012, increases employment over the same time period by 3.5 percentage points, and decreases five-year mortality by 1.9 percentage points. We conclude by using our reduced form estimates to calibrate a general equilibrium model of the credit market, finding that the benefits of consumer bankruptcy are an order of magnitude larger than previously estimated