The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Consumption, Debt and Portfolio Choice: Testing the Effect of Bankruptcy Law
Andreas Lehnert and Dean M. Maki

Abstract: 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.

Keywords: Bankruptcy law, household debt, portfolio puzzle

Full paper (324 KB PDF) | Full paper (608 KB Postscript)

Home | FEDS | List of 2002 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: March 4, 2002