It’s not (only) personal, it’s business: Personal bankruptcy exemptions and local small business credit

Abstract

In the U.S., state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-MSA variation in personal bankruptcy exemptions created by state borders to identify the spillover effects of these laws on small business credit availability. We find a reduction of 1-2.2% in credit volume following exemption increases. The effect is strongest for the smallest businesses, which are more financially constrained. Increases in exemptions lead to fewer small establishments, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.

Keywords: Bank lending; Bankruptcy exemption laws; Debtor protection; Credit availability; Small-business lending

JEL Classification: G32, G33, K35, M10