Does Bankruptcy Protection Affect Asset Prices? Evidence from changes in Homestead Exemptions

Abstract

Does the ability to protect an asset from unsecured creditors affect its price? This paper identifies the impact of bankruptcy protection on house prices using 139 changes in homestead exemptions. Large increases in the homestead exemption raised house prices 3% before 2005. Smaller exemption increases, to adjust for inflation, did not affect house prices. The effect disappeared after BAPCPA, a 2005 federal law designed to prevent bankruptcy abuse. The effect was bigger in inelastic locations.

Keywords: bankruptcy, house prices, consumer credit, BAPCPA

JEL Classification: G33, G5, D12, G21, K35