How Does Consumer Bankruptcy Protection Impact Household Outcomes?
92 Pages Posted: 1 Aug 2016 Last revised: 18 Jul 2022
Date Written: July 15, 2022
Chapter 7 bankruptcy, the main debt relief program for U.S. households, provides more than $150 billion in debt relief each year, yet its impact on consumers remains unclear. Using unique hand-collected data from individual bankruptcy petitions, I employ a regression discontinuity design to estimate Chapter 7’s effect on households’ subsequent real investment and financial performance. Chapter 7 protection increases the probability of a debtor creating a new business, becoming a first-time homeowner, and avoiding home foreclosure. Although Chapter 7 protects people in a variety of ways—for example, by stopping creditor harassment—the above findings arise because of debt relief.
Keywords: Debt relief, consumer bankruptcy, household finance, foreclosure, investment
JEL Classification: D14, K35, G18, G11, G21
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