Bankruptcy Exemptions, Garnishment Laws and Consumer Default Behavior: An Empirical Analysis of Credit Card Data
Posted: 23 Apr 2005
In this paper, we examine how homestead, personal property, and garnishment laws affect consumer's default behavior by focusing on the credit card market. After controlling for credit supply and "shock effect" variables we investigate whether consumer propensity for formal and informal bankruptcy changes with respect to the exemption levels those resident cardholders enjoy. Our results show that loose garnishment and property exemption laws increase default. However, a closer look reveals that loose garnishment and property laws encourage informal bankruptcy and loose homestead and property laws encourage formal bankruptcy. The results show a certain degree of substitutability between formal and informal bankruptcy. The substitutability raises concerns about the current bankruptcy reform since this will not necessarily improve the default rates even thought it may reduce bankruptcy filings.
Keywords: Garnishment law, consumer default, credit cards
JEL Classification: C250, D120, G210, G330
Suggested Citation: Suggested Citation