Intergenerational Effects of Debt Relief: Evidence from Bankruptcy Protection

Abstract

Using bankruptcy filing information for parents matched to administrative data on their children and leniency of the randomly assigned judges as an instrument, we document the effect of parental bankruptcy protection on children's income and intergenerational mobility. We find that children whose parents receive Chapter 13 bankruptcy protection earn $1,755 (or 5.6%) higher annual income relative to those whose parents file for but do not receive protection. Our results are increasing in the duration lapsed from filing and over the life cycle of children. Parental bankruptcy protection leads to higher income by 2.8% at age 20, 8.8% at age 25 and 35.4% at age 40. Back-of-the-envelope calculations suggest that for one dollar of debt relief granted to parents through Chapter 13 protection their children earn two dollars more in adjusted present value of lifetime earnings. Children of parents who receive protection are more likely to be in the top tercile of income distribution, which is driven by an increase in intergenerational upward mobility for children whose parents receive protection rather than an increase in downward mobility for those whose parents were denied protection. These results highlight the potential role of bankruptcy protection and debt relief more broadly in helping improve intergenerational mobility for low-income distressed households. Finally, our results are most consistent with higher investment in education and skill-development as the mechanism contributing to these findings. We do not find support for neighborhood effects driving our estimates.

Keywords: Debt relief, bankruptcy protection, intergenerational effects, income, intergenerational mobility

JEL Classification: G50, D10, J62, E24, J22, K35