Analysts are firmly of the view that the long-term effect of the new law will be to reduce the number of Chapter 7 filings. In addition, spokesmen for the credit card industry have repeatedly pointed to the "flip side" of erecting barriers to Chapter 7 filing: Credit costs are expected to decline because credit card debt will become less risky for lenders. These two effects — permanently lower filing rates, on the one hand, and permanently lower default premiums on unsecured loans, on the other — are viewed as the key implications of the bankruptcy reform bill.

Indications are that reform has made filing for Chapter 7 more difficult, although the immediate effect of the law was to increase the filing rate. The law was passed by the House in April 2005 but did not go into effect until October. Thus, there was approximately a six-month period during which debtors who anticipated filing for bankruptcy in the near future and who feared that they would be ineligible for a Chapter 7 discharge under the new law or that the new law would make a Chapter 7 filing more costly had a strong incentive to file early under the old law. Apparently many struggling debtors took this view, and Chapter 7 filings soared in 2005. Consistent with the stiffer standards for discharge, the annual rate of Chapter 7 filings has been much lower in the first half of 2006. It is less clear if these stiffer standards have had any effect on interest rates charged on consumer loans. However, we can be reasonably sure that if personal bankruptcy filing rates stay low, the competitive pressure to reduce the default premium on consumer loans will mount, as will the pressure from consumer advocacy groups.

Therefore, it would seem that, as predicted, we are headed into a regime of low bankruptcy filing rates and low default premiums on consumer loans. Or are we? The notion that the new law would lead to permanently lower bankruptcy filings and permanently lower default premiums on consumer loans misses the point that the lower cost of credit may induce more borrowing. And because greater indebtedness is always associated with a higher chance of bankruptcy and default, the filing rate may not decline as much as one might otherwise expect. In turn, this means that, at the margin, the cost of credit may not decline as much as expected. Indeed, experience with previous changes in bankruptcy law suggests that induced changes in lending and borrowing behavior are important. The Bankruptcy Reform Act of 1978 made it relatively easy for people to file under the generous provisions of Chapter 7. Although this act was amended in 1984 to prevent opportunistic filings, the number of filings did not decline. Perhaps credit card companies, secure in their knowledge that loans were less risky, made credit available on cheaper terms to borrowers. The result was a rise in indebtedness and, ultimately, filings.