Bankruptcy Exemptions, Garnishment Laws and Consumer Default Behavior: An Empirical Analysis of Credit Card Data

Posted: 23 Apr 2005

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Chunlin Liu

University of Nevada, Reno - College of Business

Lawrence Mielnicki

De Lage Landen Financial Services

Abstract

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

Agarwal, Sumit and Liu, Chunlin and Mielnicki, Lawrence, Bankruptcy Exemptions, Garnishment Laws and Consumer Default Behavior: An Empirical Analysis of Credit Card Data. Quarterly Review of Economics and Finance, Vol. 43, No. 2, pp. 273-289, 2003. Available at SSRN: https://ssrn.com/abstract=704764

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

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

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

Lawrence Mielnicki

De Lage Landen Financial Services ( email )

1111 Old Eagle School Road
Wayne, PA 19087
United States

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