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

  • Andreas Lehnert
  • Dean M. Maki

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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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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  1. Karen Denning & Stephen Ferris & Robert Lawless, 2001. "Serial bankruptcy: plan infeasibility or just bad luck?," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 105-109.
  2. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
  3. Christopher D. Carroll & Andrew A. Samwick, 1993. "How important is precautionary saving?," Working Paper Series / Economic Activity Section 145, Board of Governors of the Federal Reserve System (U.S.).
  4. Alexopoulos, Michelle & Domowitz, Ian, 1998. "Personal Liabilities and Bankruptcy Reform: An International Perspective," International Finance, Wiley Blackwell, vol. 1(1), pages 127-59, October.
  5. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  6. 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.
  7. 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.).
  8. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. 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.
  12. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  13. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  14. Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section 126, Board of Governors of the Federal Reserve System (U.S.).
  15. 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.
  16. 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.
  17. 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(1), pages 91-196.
  18. 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.
  19. 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.
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