Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates

41 Pages Posted: 15 Jan 2012 Last revised: 16 May 2012

Tal Gross

Columbia University - Department of Health Policy and Management

Matthew Notowidigdo

University of Chicago - Booth School of Business

Jialan Wang

Consumer Financial Protection Bureau; University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 14, 2012

Abstract

This paper estimates the extent to which legal fees prevent liquidity-constrained households from declaring bankruptcy. To do so, it studies how the 2001 and 2008 income tax rebates affected consumer bankruptcy filings. We exploit the randomized timing of the rebate checks and estimate that the rebates caused a significant, short-run increase in consumer bankruptcies in both years, with larger effects in 2008 when the rebates were more generous and more widely distributed. Using hand-collected data from individual bankruptcy petitions, we document that the rebates caused an increase in the total liabilities and debt-to-income ratios of filers.

Keywords: bankruptcy, household finance, BAPCPA, tax rebates

JEL Classification: D12, H31,K19,K29

Suggested Citation

Gross, Tal and Notowidigdo, Matthew and Wang, Jialan, Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates (January 14, 2012). Available at SSRN: https://ssrn.com/abstract=1985272 or http://dx.doi.org/10.2139/ssrn.1985272

Tal Gross (Contact Author)

Columbia University - Department of Health Policy and Management ( email )

600 West 168th Street, 6th Floor
New York, NY 10032
United States

HOME PAGE: http://www.talgross.com

Matthew Notowidigdo

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Jialan Wang

Consumer Financial Protection Bureau ( email )

United States

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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