Three essays on consumer bankruptcy and exemptions

This dissertation examines the economic effects of state and federal laws, commonly known as bankruptcy exemptions, which protect the assets of a debtor who defaults on his debts. Chapter 1 examines these laws in the context of the costly state verification literature. Chapter 2 uses cross-sectional and time series variation in these laws to improve upon a literature which asks: (1) Do larger exemptions lead to higher bankruptcy filing rates? and (2) Do larger exemptions affect the choice of bankruptcy chapter? Chapter 3 uses similar techniques to examine the effect of these laws on the home mortgage credit market. Chapter 1 demonstrates that because many exemptions may be waived through the use of secured credit, large exemptions, by themselves, do not necessarily lead to a sub-optimal contract. Chapter 2 finds that while the use of cross-sectional and time series variation leads to greater support for the proposition that larger exemptions lead to higher filing rates, this result is not as strong as one might expect. Several reasons are given for this result. Among the reasons not cited in the previous literature is the fact that many exemptions protect the assets of a defaulting debtor who does not file for bankruptcy and thus do not necessarily make bankruptcy relatively more attractive. In contrast to previous papers which examine credit generally, Chapter 3 finds that large homestead exemptions do not increase the probability of denial or the interest rate on home mortgage loans and may, in fact, reduce both of these variables. While personal property exemptions may lead to a higher probability of denial and increased interest rates, this effect does not appear to be economically significant. This conflict with the previous literature most likely stems from the seniority of the mortgage with respect to the home which insulates the mortgage from many of the adverse consequences of exemptions