Asset Exemptions and Consumer Bankruptcies: Evidence from Individual Filings
Combining case-level data on all consumer bankruptcies in the last decade with changes in states' homestead exemption levels, we estimate how exemption changes affect the number and composition of bankruptcy filers. When exemptions become more debtor- friendly, there is an immediate and persistent increase in Chapter 7 filings by debtors with home equity. The new filers have more home equity but similar non-housing wealth and lower incomes than the average filer with home equity. Thus, raising exemptions draws wealthier, but lower-income households into bankruptcy. Moreover, the additional bankruptcies are filed by households whose home equity becomes completely protected by the exemption increase, indicating that having even a small amount of non-exempt equity is a significant deterrent to filing.