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Evidence on the insurance effect of bankruptcy exemptions

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  • Grant, Charles

Abstract

Defaulting on one's debts when experiencing an adverse event can help insure households against unexpected income risks. But the effect of allowing default on debt levels is ambiguous, not least because lenders may restrict access to credit. Hence the optimal punishment for bankruptcy is unclear. The US states allows householders to keep a variety of assets when filing for bankruptcy - the 'bankruptcy exemptions' - and these exemptions change substantially between states and over time. By exploiting these differences this study shows that raising the exemptions (i) marginally decreases the level of unsecured debt that household's hold; (ii) makes consumption smoother. Thus, despite the effect on debt levels, the generous provisions to debtors in arrears may be helping US households to insure themselves against income risk.

Suggested Citation

  • Grant, Charles, 2010. "Evidence on the insurance effect of bankruptcy exemptions," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2247-2254, September.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2247-2254
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    1. Nejadmalayeri, Ali & Singh, Manohar, 2012. "Corporate taxes, strategic default, and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2900-2916.
    2. Aloisio Araujo & Bruno Funchal, 2015. "How Much Should Debtors be Punished in Case of Default?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 229-245, April.
    3. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    4. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    5. Geraldo Cerqueiro & María Fabiana Penas & Robert Seamans, 2017. "Personal Bankruptcy Law and Entrepreneurship," Working Papers 17-42, Center for Economic Studies, U.S. Census Bureau.
    6. Geraldo Cerqueiro & María Fabiana Penas & Robert Seamans, 2017. "Personal Bankruptcy Law and Entrepreneurship," Working Papers 17-42r, Center for Economic Studies, U.S. Census Bureau.

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