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Personal Bankruptcy Protection and Household Debt

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Abstract

Increasing personal bankruptcy protection raises consumers’ desire to borrow and lenders’ cost of extending credit; the impact on equilibrium borrowing is ambiguous. Using bankruptcy protection changes between 1999 and 2005 across U.S. states, we find that borrowers respond to greater protection by increasing their unsecured debt. Border county estimates suggest that local economic conditions do not drive these results. Borrowers pay more for protection through higher interest rates, yet delinquency is unaffected. Remarkably, our results indicate that rising borrower demand outstripped decreasing supply. Increased protections did not reduce the aggregate level of household debt but affected the composition of borrowing.

Suggested Citation

  • Meta Brown & Rajashri Chakrabarti & Felipe Severino, 2024. "Personal Bankruptcy Protection and Household Debt," Staff Reports 1099, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:98134
    DOI: 10.59576/sr.1099
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    More about this item

    Keywords

    bankruptcy; debt; credit cards; delinquency;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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