Proximity to Help Matters: The Effect of Access to Centers of Legal Aid on Bankruptcy Rates

Kristina Hrehova and Stefan Domonkos

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Personal bankruptcy aims to provide a fresh start to debtors. While bankruptcy is often the only solution to financial distress, large spatial distance to affordable legal services may result in its underuse by eligible debtors. Using a large administrative dataset of personal bankruptcies, we study the impact of spatial distance from public Centers for Legal Aid (CLAs) on the regional incidence of personal bankruptcy in Slovakia. We avoid endogeneity by focusing on the increased availability of legal aid controlling for the expected distance from the nearest CLA, which serves as the first contact point in the process of filing for personal bankruptcy in the Slovak Republic. Distance from these legal aid centers has a significant impact on personal bankruptcy rates: the closer the nearest CLA is, the larger the prevalence of personal bankruptcy is in a given municipality. We quantify the impact of service access on personal bankruptcy rates, showing that improved access to free legal aid has both a statistically and substantively significant impact on the use of personal bankruptcy by the public. At the end of the almost 3-year-long period analyzed, municipalities with good access to CLAs had 3.3 bankruptcies more per 1,000 inhabitants than municipalities with weak access to CLAs. This effect is significant, as the average national bankruptcy rate until December 2019 reached 6.3 bankruptcies per 1,000 persons.

Keywords: personal bankruptcy; insolvency; policy analysis; regional inequalities; spatial access, public services (search for similar items in EconPapers)
JEL-codes: D63 G51 K35 O18 R53 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-law and nep-ure
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