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Fresh start or head start? Uniform bankruptcy exemptions and welfare

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  • Athreya, Kartik

Abstract

The 1990's witnessed a historically unprecedented number of personal bankruptcy filings. In response, congressional debate over bankruptcy law has recently led to several proposals aimed at making it more difficult to exempt wealth in bankruptcy. In this paper, I evaluate uniform exemption policy primarily within the context of the recent congressional proposal H.R. 975. I develop an incomplete markets model where secured and unsecured assets coexist and are treated differentially in a bankruptcy proceeding. I find that exemptions are associated positively with filing rates and the amount of equity held at the time of filing. Conversely, exemptions are strongly negatively associated with the availability of unsecured credit. The welfare consequences of exemptions, while small, are positive for high exemptions and negative for low ones. Steady state welfare is maximized under a full exemption, and is worth $28.24 annually to the average household. The results are robust, and show that increases in bankruptcy exemptions beyond current state averages are largely a matter of indifference, and do not merit the heated debate they have generated.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 11 (November)
Pages: 2051-2079

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:11:p:2051-2079

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Cited by:
  1. Telyukova, Irina A., 2012. "Household Need for Liquidity and the Credit Card Debt Puzzle," University of California at San Diego, Economics Working Paper Series qt0ww2c04z, Department of Economics, UC San Diego.
  2. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
  3. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
  4. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sánchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
  5. Jochen, Mankart, 2012. "The (Un-) importance of Chapter 7 wealth exemption levels," Economics Working Paper Series 1211, University of St. Gallen, School of Economics and Political Science, revised Sep 2013.
  6. repec:iza:izadps:dp1805 is not listed on IDEAS
  7. Thomas Hintermaier & Winfried Koeniger, 2009. "Debt Portfolios," Working Papers 646, Queen Mary, University of London, School of Economics and Finance.
  8. Mankart, Jochen, 2011. "The optimal Chapter 7 exemption level in a life-cycle model with asset portfolios," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48703, Verein für Socialpolitik / German Economic Association.
  9. Grant, Charles, 2010. "Evidence on the insurance effect of bankruptcy exemptions," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2247-2254, September.
  10. Marina Pavan, 2003. "Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection," Boston College Working Papers in Economics 573, Boston College Department of Economics, revised 01 May 2005.
  11. Akyol, Ahmet & Athreya, Kartik, 2011. "Credit and self-employment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 363-385, March.

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