It’s not (only) personal, it’s business: personal bankruptcy exemptions and business credit

Rebel A Cole, Jason Damm, John Hackney and Masim Suleymanov

Review of Finance, 2025, vol. 29, issue 1, 275-313

Abstract: In the USA, state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-metropolitan statistical area variation in personal bankruptcy exemptions created by state borders and a stacked regression approach to identify the spillover effects of these laws on business credit extended to small firms. Subsequent to exemption increases, we find a reduction of 1–2 percent in originations of business credit. The effect is strongest for the smallest firms, which are more financially constrained. We provide household-level evidence that both business debt and personal debt decline for borrowers whose home equity becomes covered by the exemption, suggesting an overall decrease in credit availability for small businesses. As a result, increases in exemptions lead to fewer small establishments and lower employment, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.

Keywords: bank lending; bankruptcy exemption laws; business credit; debtor protection; small business lending (search for similar items in EconPapers)
JEL-codes: G32 G33 K35 M10 (search for similar items in EconPapers)
Date: 2025
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