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

Andreas Lehnert and Dean M. Maki

No 2002-14, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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; Consumption (Economics) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: Written 2002
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