Personal Bankruptcy and Credit Supply and Demand

This paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit. While generous state-level bankruptcy exemptions are probably viewed by most policymakers as benefitting less-well-off borrowers, our results using data from the 1983 Survey of Consumer Finances suggest they increase the amount of credit held by high-asset households and reduce the availability and amount of credit to low-asset households, conditioning on observable characteristics. We also find evidence that interest rates on automobile loans for low-asset households are higher in high exemption states. Thus, bankruptcy exemptions redistribute credit toward borrowers with high assets.