Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates
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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