Evidence on the Effect of US Consumer Bankruptcy Exemptions
AbstractBankruptcy (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 InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 253.
Date of creation: 2004
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Consumption; Bankruptcy Law; Debt; Insurance;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Personal Finance
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- K19 - Law and Economics - - Basic Areas of Law - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
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