Finance and Economics Discussion Series (FEDS)
March 2002
Consumption, Debt and Portfolio Choice: Testing the Effect of Bankruptcy Law
Andreas Lehnert and Dean M. Maki
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 (608 KB Postscript)Keywords: Bankruptcy law, household debt, portfolio puzzle
PDF: Full Paper
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