How Does Consumer Bankruptcy Protection Impact Household Outcomes?

Abstract

Chapter 7 bankruptcy protection provides more than $100 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 the effect of Chapter 7 on subsequent household investment behavior and financial performance. I find that Chapter 7 protection increases the probability of the filer (i) creating a new business, (ii) obtaining secured lending, (iii) becoming a homeowner, and (iv) avoiding home foreclosure. Additional tests suggest that although Chapter 7 protects individuals in a variety of ways, the above findings arise because of debt relief.

Keywords: Personal Bankruptcy, Debt Relief, Household Finance, Foreclosure, Credit Constraints, Investment

JEL Classification: D14, K35, G18, G11, G21