Personal Bankruptcy Protection and Household Debt

Felipe Severino, Meta Brown, Brandi Coates
2014 Social Science Research Network  
Personal bankruptcy laws protect a fraction of an individual's assets from seizure by unsecured creditors in case of default. An increase in the level of bankruptcy protection diminishes the collateral value of assets, and can therefore reduce borrowers' access to credit. However, it might also increase the demand for credit especially from risk averse borrowers by improving risksharing. Using changes in the level of protection across US states and across time, we show that bankruptcy
more » ... ankruptcy protection laws increase borrowers' holdings of unsecured credit, but leave secured debt -mortgage and auto loans-unchanged. At the same time we find an increase in the interest rate for unsecured credit, but not for other types of credit. The effect is predominantly driven by lower-income areas and regions with higher home ownership concentration, for which an increase in the level of protection explains between 10% and 30% of the growth in their credit card debt. Using detailed individual data, we find no measurable increase in delinquency rates of households in the subsequent three years. These results suggest that changes in bankruptcy protections did not reduce the aggregate level of household debt, but they might have affected the composition of borrowing.
doi:10.2139/ssrn.2447687 fatcat:kjcdfvxturaghmsui7bwilukwe