Labor market upheaval, default regulations, and consumer debt

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment. By contrast, informal default through delinquency rose sharply. In the subsequent recovery, households have been widely viewed as “deleveraging” (Mian and Sufi, 2010, Eggertson and Krugman, 2012) via the largest reduction of unsecured debt seen in the past three decades. We measure the relative roles of recent bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession. Our results suggest that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both.