Changes in Personal Bankruptcy Protection Laws: The Impact on Bank Lending to Small Businesses
57 Pages Posted: 6 Oct 2018 Last revised: 28 Mar 2021
Date Written: December 14, 2020
In the U.S., individuals who file for bankruptcy can protect certain property from creditor liquidation during the debt settlement process. We find that additional property protection, brought about by changes to personal bankruptcy laws, reduces credit availability for small businesses. Particularly in the sample of large loans greater than $100,000, which are the most at risk of loss in case of default. This impact is more severe during times of financial crisis when bankruptcy rates rise. Changes to bankruptcy protection laws also have real economic consequences for small business activity, leading to lower wages and fewer establishments per capita.
Keywords: Bank lending; Bankruptcy exemption laws; Debtor protection; Credit availability; Small-business lending
JEL Classification: G32, G33, K35, M10
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