Who Files for Bankruptcy?
Written by
Michelle Miller
|
|
Michelle Miller Assistant Professor Finance and Economics millerm@business.rutgers.edu |
Abstract
The characteristics of bankrupt households (such as income levels and asset levels) vary widely across states. This paper asks whether these variations can be attributed to state bankruptcy statutes such as property exemption laws or garnishment laws. Using a new household-level dataset, I find that high exemption levels encourage high asset households to file for bankruptcy while high garnishment rates encourage low income households to file. The results support a theoretical model in which households choose between repayment, bankruptcy, and non-response (which occurs when households simply “walk away” from their bills). Although previous theoretical models have ignored non-response, it is, in fact, an important alternative form of “relief” for many households in financial distress.
