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 exemptions, we estimate how exemptions affect the number and composition of bankruptcy filers. Exemption increases are followed by immediate and persistent rises in Chapter 7 filings by debtors with home equity. The new filers have more home equity but similar nonhousing wealth and lower incomes than the average filer with home equity. Thus, raising exemptions draws wealthier but lower-income households into bankruptcy. Moreover, most of the new filers report home equity that became fully protected only after the exemption increase. This result is consistent with debtors refusing to file with any nonexempt home equity for fear that they will lose their homes in bankruptcy. Finally, we investigate the extent to which debtors manipulate their reported home values to appear fully exempt and discuss how this affects the interpretation of our results