Keywords: Bankruptcy law, household debt, portfolio puzzle
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.
Full paper (324 KB PDF)
| Full paper (608 KB Postscript)
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Last update: March 4, 2002