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Evidence on the Effect of US Consumer Bankruptcy Exemptions

Author

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  • Charles Grant

Abstract

Bankruptcy (defaulting on one's debts) acts as insurance if it allows default in cases of negative income shocks. However, if debts are not fully recoverable, lenders may instead react by limiting the amount that they allow households to borrow. This upper borrowing limit will increase as the punishment for defaulting increases. The US provides a natural test for these effects since rules about which assets may be kept by the debtor (the exemptions) when filing for bankruptcy differ dramatically across the different states. While increasing the level of these exemptions causes less debt to be held by consumers, empirical results also show that consumption becomes much smoother, suggesting that these bankruptcy exemptions help households insure themselves against adverse shocks

Suggested Citation

  • Charles Grant, 2004. "Evidence on the Effect of US Consumer Bankruptcy Exemptions," 2004 Meeting Papers 253, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:253
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    File URL: http://www.iue.it/FinConsEU/Charles/bank12.pdf
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    Citations

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    Cited by:

    1. Hülya Eraslan & Gizem Koşar & Wenli Li & Pierre‐Daniel Sarte, 2017. "An Anatomy Of U.S. Personal Bankruptcy Under Chapter 13," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 671-702, August.

    More about this item

    Keywords

    Consumption; Bankruptcy Law; Debt; Insurance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K19 - Law and Economics - - Basic Areas of Law - - - Other

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