Fresh Start or Head Start? Uniform Bankruptcy Exemptions and Welfare

FRB Richmond Working Paper No. 03-3R

35 Pages Posted: 3 Dec 2012

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: July 26, 2004

Abstract

The 1990's witnessed a historically unprecedented number of personal bankruptcy filings. In response, congressional debate over bankruptcy law has recently led to several proposals aimed at making it more difficult to exempt wealth in bankruptcy. In this paper, I evaluate uniform exemption policy primarily within the context of the recent congressional proposal H.R. 975. I develop an incomplete markets model where secured and unsecured assets coexist and are treated differentially in a bankruptcy proceeding. I find that exemptions are associated positively with filing rates and the amount of equity held at the time of filing. Conversely, exemptions are strongly negatively associated with the availability of unsecured credit. The welfare consequences of exemptions, while small, are positive for high exemptions and negative for low ones. Steady state welfare is maximized under a full exemption, and is worth $28.24 annually to the average household. The results are robust, and show that increases in bankruptcy exemptions beyond current state averages are largely a matter of indifference, and do not merit the heated debate they have generated.

Keywords: bankruptcy, exemptions, risk-sharing, incomplete markets

JEL Classification: D52, D58, G33

Suggested Citation

Athreya, Kartik, Fresh Start or Head Start? Uniform Bankruptcy Exemptions and Welfare (July 26, 2004). FRB Richmond Working Paper No. 03-3R, Available at SSRN: https://ssrn.com/abstract=2184521 or http://dx.doi.org/10.2139/ssrn.2184521

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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