Personal Bankruptcy Protection and Household Debt

Abstract

Increasing personal bankruptcy protection increases consumers' desire to borrow and lenders' cost of extending credit; the impact on equilibrium borrowing is ambiguous. Using bankruptcy protection changes across U.S. states between 1999 and 2005, we find that borrowers respond to increased protection by increasing their unsecured debt. Border-county estimates suggest that local economic conditions do not drive these results. Borrowers pay more for protection through higher interest rates, yet delinquency is unaffected. Remarkably, our results indicate that rising borrower demand outstripped decreasing supply in this period. The aggregate level of household debt did not decrease, but the composition of borrowing changed.

Keywords: household debt, credit markets

JEL Classification: G00, G33, G51, D14, D18, K35, R2