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Consumption, debt and portfolio choice: testing the effect of bankruptcy law

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Author Info
Andreas Lehnert
Dean M. Maki

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Abstract

Consumer bankruptcy laws, which vary across states and over time, permit debtors to keep assets below a statutory exemption while debts are forgiven. High exemptions distort household portfolio decisions and tempt households to default on debts, but they also provide a crude form of consumption insurance. We combine information on state-level bankruptcy laws with the Consumer Expenditure Survey from 1984-1999. We find that higher exemptions are associated with (1) higher bankruptcy rates, (2) households that are more likely to simultaneously hold low-return liquid assets and owe high-cost unsecured debt, and (3) slightly better insurance for renters and worse insurance for homeowners.

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Publisher Info
Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-14.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-14

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Related research
Keywords: Bankruptcy ; Consumption (Economics);

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Denning, Karen C & Ferris, Stephen P & Lawless, Robert M, 2001. "Serial Bankruptcy: Plan Infeasibility or Just Bad Luck?," Applied Economics Letters, Taylor and Francis Journals, vol. 8(2), pages 105-109, February. [Downloadable!] (restricted)
  2. Baird, Douglas G & Morrison, Edward R, 2001. "Bankruptcy Decision Making," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(2), pages 356-72, October.
  3. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
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  4. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September. [Downloadable!] (restricted)
  5. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May. [Downloadable!] (restricted)
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  6. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September. [Downloadable!] (restricted)
  7. Michelle Alexopoulos & Ian Domowitz, . "Personal Liabilities and Bankruptcy Reform: An International Perspective," IPR working papers 98-8, Institute for Policy Resarch at Northwestern University.
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  8. Jon P. Nelson, 1999. "Consumer Bankruptcy And Chapter Choice: State Panel Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 552-566, October. [Downloadable!] (restricted)
  9. Fay, S. & Hurst, E. & White, M.J., 1998. "The Bankruptcy Decision: Does Stigma Matter?," Papers 98-01, Michigan - Center for Research on Economic & Social Theory.
  10. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1994. "Expanding the Life-Cycle Model: Precautionary Saving and Public Policy," American Economic Review, American Economic Association, vol. 84(2), pages 174-79, May. [Downloadable!] (restricted)
  11. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April. [Downloadable!] (restricted)
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  12. Carroll, Christopher D, 1994. "How Does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 111-47, February. [Downloadable!] (restricted)
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  13. Christopher D. Carroll & Andrew A. Samwick, 1998. "How Important Is Precautionary Saving?," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 410-419, August. [Downloadable!] (restricted)
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  14. Karen E. Dynan & Dean M. Maki, 2001. "Does stock market wealth matter for consumption?," Finance and Economics Discussion Series 2001-23, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  15. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-1), pages 91-196. [Downloadable!]
  16. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02. [Downloadable!] (restricted)
  17. James X. Sullivan, 2005. "Borrowing during unemployment: unsecured debt as a safety net," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
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  18. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
  19. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
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  20. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  2. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York. [Downloadable!]
  3. Irina A. Telyukova & Randall Wright, 2007. "A model of money and credit, with application to the credit card debt puzzle," Working Paper 0711, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Lucia Dunn & Tufan Ekici, 2006. "Credit Card Debt and Consumption: Evidence from Household-Level Data," Working Papers 06-01, Ohio State University, Department of Economics. [Downloadable!]
  5. Telyukova, Irina A., 2009. "Household Need for Liquidity and the Credit Card Debt Puzzle," MPRA Paper 6674, University Library of Munich, Germany. [Downloadable!]
    Other versions:
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