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Evidence on the Effect of US Consumer Bankruptcy Exemptions

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  • Charles GRANT
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    Abstract

    Bankruptcy (defaulting on one's debts) acts as insurance if it allows default in cases of negative income shocks. However, if debts are not fully recoverable, lenders may instead react by limiting the amount that they allow households to borrow. This upper borrowing limit will increase as the punishment for defaulting increases. The US provides a natural test for these effects since rules about which assets may be kept by the debtor (the exemptions) when filing for bankruptcy differ dramatically across the different states. While increasing the level of these exemptions causes less debt to be held by consumers, empirical results also show that consumption becomes much smoother, suggesting that these bankruptcy exemptions help households insure themselves against adverse shocks.

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    Bibliographic Info

    Paper provided by European University Institute in its series Economics Working Papers with number ECO2003/19.

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    Date of creation: 2003
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    Handle: RePEc:eui:euiwps:eco2003/19

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    Cited by:
    1. Hülya Eraslan & Wenli Li & Pierre-Daniel G. Sarte, 2007. "The anatomy of U.S. personal bankruptcy under Chapter 13," Working Paper 07-05, Federal Reserve Bank of Richmond.
    2. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.

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