 Personal bankruptcy and post-bankruptcy liquidity constraintHo-Seok Lee and Byung Hwa Lim Journal of Banking & Finance, 2023, vol. 152, issue C Abstract: Once a debtor files for bankruptcy under Chapter 7, all or some of the unsecured debts are discharged and the debtor is endowed with a financial fresh start. However, a post-bankruptcy consumer faces restrictions on borrowing against future income and is likely to be liquidity constrained. This paper intends to provide a quantitative analysis regarding the effects of limits for borrowing against future income imposed on a post-bankruptcy consumer. We obtain explicit expressions for the optimal consumption, investment in the risky asset, and discretionary bankruptcy decision through a duality approach when there exists a liquidity constraint after bankruptcy. The quantitative results show that a post-bankruptcy constraint has significant impacts on a debtor’s consumption, investment, and bankruptcy wealth level. The effects of an opportunity to file for bankruptcy compete with those of post-bankruptcy liquidity constraints. We find the criterion for the latter to dominate the former. We also provide implications on the expected time to bankruptcy. Keywords: Bankruptcy; Consumption and investment; Liquidity constraint; Duality approach (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:152:y:2023:i:c:s0378426623000857 DOI: 10.1016/j.jbankfin.2023.106861 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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