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Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates

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  • Lars Lefgren
  • Frank McIntyre

Abstract

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.

Suggested Citation

  • Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, May.
  • Handle: RePEc:ucp:jlawec:v:52:y:2009:i:2:p:367-393
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    References listed on IDEAS

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    1. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 217-251.
    2. Hynes, Richard M & Malani, Anup & Posner, Eric A, 2004. "The Political Economy of Property Exemption Laws," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 19-43, April.
    3. Buckley, F H & Brinig, Margaret F, 1998. "The Bankruptcy Puzzle," The Journal of Legal Studies, University of Chicago Press, vol. 27(1), pages 187-207, January.
    4. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, February.
    5. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
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    Citations

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    Cited by:

    1. Jonah B. Gelbach, 2016. "When Do Covariates Matter? And Which Ones, and How Much?," Journal of Labor Economics, University of Chicago Press, vol. 34(2), pages 509-543.
    2. Aysun, Uluc, 2014. "Bankruptcy resolution capacity and economic fluctuations," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 387-399.
    3. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
    4. Donald D. Hackney & Daniel Friesner & Matthew Q. McPherson, 2015. "Do Debtors Have an Obvious Financial Rationale for Filing a Chapter 13 Bankruptcy Petition?," Economics Bulletin, AccessEcon, vol. 35(3), pages 1572-1588.
    5. Mankart, Jochen, 2014. "The (Un-) importance of Chapter 7 wealth exemption levels," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 1-16.
    6. Mary Eschelbach Hansen, 2014. "Sources of Credit and the Extent of the Credit Market: A View from Bankruptcy Records, Mississippi 1929-1936," Working Papers 2014-09, American University, Department of Economics.
    7. Dawsey, Amanda E., 2015. "State bankruptcy laws and the responsiveness of credit card demand," Journal of Economics and Business, Elsevier, vol. 81(C), pages 54-76.
    8. repec:eee:finsta:v:33:y:2017:i:c:p:1-22 is not listed on IDEAS
    9. Garrett, Thomas A. & Wall, Howard J., 2014. "Personal-Bankruptcy Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 18(07), pages 1488-1507, October.
    10. Olga Gorbachev & María José Luengo-Prado, 2016. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy," Working Papers 16-06, University of Delaware, Department of Economics.
    11. Uluc Aysun & Raman Khaddaria, 2012. "Bankruptcy resolution capacity and regional economic fluctuations," Working Papers 2012-01, University of Central Florida, Department of Economics.
    12. Chintal Desai & Gregory Elliehausen & Edward Lawrence, 2014. "On the County-Level Credit Outcome Beta," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(2), pages 201-218, April.
    13. Hansen, Mary Eschelbach & Hansen, Bradley A., 2012. "Crisis and Bankruptcy: The Mediating Role of State Law, 1920–1932," The Journal of Economic History, Cambridge University Press, vol. 72(02), pages 448-468, June.
    14. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    15. Neil Bhutta & Jacob Goldin & Tatiana Homonoff, 2016. "Consumer Borrowing after Payday Loan Bans," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 225-259.
    16. Chakrabarti, Rajashri & Pattison, Nathaniel, 2016. "Auto credit and the 2005 bankruptcy reform: the impact of eliminating cramdowns," Staff Reports 797, Federal Reserve Bank of New York.
    17. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
    18. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.
    19. Lefgren Lars & McIntyre Frank L & Miller Michelle, 2010. "Chapter 7 or 13: Are Client or Lawyer Interests Paramount?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, September.
    20. Aysun, Uluc, 2015. "Duration of bankruptcy proceedings and monetary policy effectiveness," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 295-302.

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