The Effect of Bankruptcy Exemptions on Consumer Credit

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Chapter 7 of US bankruptcy law allows consumers to exempt a portion of the value of their homes and personal property from unsecured creditors. The levels of exemptions vary widely across states and change frequently. We study the effect of increases in these exemptions on the supply of and demand for credit card, mortgage, and auto loan credit. We use detailed account-level administrative data to directly observe applications for new credit and new accounts following the applications instead of using proxies such as debt loads as in prior literature on this topic. We find no effect of homestead exemptions on access to credit and only modest effects on access to credit and credit card interest rates from increases in nonhome property exemptions. We find no effect of changes in exemption rates on demand for credit.

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