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Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates

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  • Lars Lefgren
  • Frank McIntyre

Abstract

Bankruptcy rates vary tremendously across states, and it is not obvious why. The number of candidate explanations is large relative to the number of states. To overcome this problem, we use zip-code-level data to identify the importance of demographic variables using within-state variation. This preserves state-level degrees of freedom to identify the impact of state policy variables. Demographics, wage garnishment restrictions, and the fraction of bankruptcies filed under Chapter 13 explain 70 percent of the variation in filing rates across states. Exemption rates, size of public safety nets, and payday loan regulations contribute virtually nothing to the cross-state variance in filing rates. Our findings suggest that state bankruptcy rates reflect the relative costs of filing for formal bankruptcy versus informal default. States without effective wage garnishment provisions allow easy informal default. Furthermore, repayment plans mandated under Chapter 13 bankruptcy often lead to repeated bankruptcy filings. (c) 2009 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 52 (2009)
Issue (Month): 2 (05)
Pages: 367-393

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Handle: RePEc:ucp:jlawec:v:52:y:2009:i:2:p:367-393

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Mankart, Jochen, 2014. "The (Un-) importance of Chapter 7 wealth exemption levels," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 1-16.
  2. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
  3. Aysun, Uluc, 2014. "Bankruptcy resolution capacity and economic fluctuations," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 387-399.
  4. Chintal Desai & Gregory Elliehausen & Edward Lawrence, 2014. "On the County-Level Credit Outcome Beta," Journal of Financial Services Research, Springer, vol. 45(2), pages 201-218, April.
  5. Satyajit Chatterjee & Grey Gordon, 2011. "Dealing with consumer default: bankruptcy vs. garnishment," Working Papers 11-35, Federal Reserve Bank of Philadelphia.
  6. Garrett, Thomas A. & Wall, Howard J., 2010. "Personal-bankruptcy cycles," MPRA Paper 30759, University Library of Munich, Germany.
  7. Uluc Aysun & Raman Khaddaria, 2012. "Bankruptcy resolution capacity and regional economic fluctuations," Working Papers 2012-01, University of Central Florida, Department of Economics.
  8. Hansen, Mary Eschelbach & Hansen, Bradley A., 2012. "Crisis and Bankruptcy: The Mediating Role of State Law, 1920–1932," The Journal of Economic History, Cambridge University Press, vol. 72(02), pages 448-468, June.
  9. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
  10. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.

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