Forum-Shopping and Personal Bankruptcy

Posted: 8 Mar 2003

See all articles by Ronel Elul

Ronel Elul

Federal Reserve Bank of Philadelphia

Narayanan Subramanian

Cornerstone Research - Boston Office

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Abstract

The dramatic increase in U.S. personal bankruptcy filings of the last fifteen years has focused attention on the wide disparities between different states' personal bankruptcy exemptions. These differences have been criticized both on the grounds of equity and also because they provide an incentive to move to a state with a higher exemption before declaring bankruptcy, that is to forum-shop. This paper focuses on the latter of these objections. Using data from the Panel Study of Income Dynamics (PSID), we estimate a Nested Logit model of the household migration decision. Our econometric approach specifically avoids the problem of endogenously induced bankruptcy filings by examining the effect of filing propensity, rather than the actual event of filing, on the tendency to migrate to a higher exemption state. We conclude that while there is indeed evidence that considerations of bankruptcy laws do influence interstate migration, the actual effect is relatively modest. We estimate that, in any given year, roughly one percent of moves to higher-exemption states are motivated by considerations of differences in bankruptcy laws; by way of comparison, this is roughly comparable to the magnitude of recent estimates of welfare-induced migration. This suggests that the emphasis on differences in exemptions which has been a feature of recent attempts to reform the bankruptcy code is somewhat exaggerated.

Keywords: Personal bankruptcy, bankruptcy exemptions, forum-shopping

Suggested Citation

Elul, Ronel and Subramanian, Narayanan, Forum-Shopping and Personal Bankruptcy. Journal of Financial Services Research, Vol. 21, No. 3, June 2002, Available at SSRN: https://ssrn.com/abstract=382868

Ronel Elul

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Narayanan Subramanian (Contact Author)

Cornerstone Research - Boston Office ( email )

699 Boylston Street
Boston, MA 02115
United States
(617) 927-3000 (Phone)
(617) 927-3100 (Fax)

HOME PAGE: http://www.cornerstone.com/

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