Accounting for the Rise in Consumer Bankruptcies∗

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households’ earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that an increase in uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the credit market transactions cost together with a decline in “stigma” does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes have played little role.