The Reacquisition of Credit Following Chapter 7 Personal Bankruptcy

Abstract

Federal law allows credit bureaus to report past bankruptcies up to ten years, so the financial implication of filing includes a ten-year influence on new credit. I document this influence with a large panel database of credit files which tracks many Chapter 7 filers past the moment when the filing disappears from potential creditors' view, providing a tightly controlled test of the filing's impact on credit access. The principal finding is that the bankruptcy flag has a big effect on the access of the more creditworthy past filers; when they lose their bankruptcy flags, their credit scores jump substantially and they open new credit relationships, high-limit bank cards in particular, quickly. Subsequently, the score-increases mostly reverse and delinquency is abnormally high.

JEL Classification: G21, G23