The Household Bankruptcy Decision

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Abstract
Personal bankruptcy é lings have risen from 0.3 percent of households per year in 1984 to around 1.35 percent in 1998 and 1999, trans- forming bankruptcy from a rare occurrence to a routine event. Lenders lost about $39 billion in 1998 due to personal bankruptcy é lings. 1 But economists have little understanding of why households é le for bankruptcy or why é lings have increased so rapidly. Until very recently, studying the household bankruptcy decision was very difé cult, because no household-level data set existed that included information on bankruptcy é lings. In this paper, we use new data from the Panel Study of Income Dynamics, which includes information on bankruptcy é l- ings, to estimate a model of households' bank- ruptcy decisions. We é nd support for the strategic model of bankruptcy, which predicts that households are more likely to é le when their é nancial beneé t from é ling is higher. Our model predicts that an increase of $1,000 in households' é nancial ben- eé t from bankruptcy would result in a 7-percent increase in the number of bankruptcy é lings. Our model also predicts that if the 1997 Na- tional Bankruptcy Review Commission' s pro- posed changes in bankruptcy exemption levels were implemented, there would be a 16-percent increase in the number of bankruptcy é lings each year. But if the $100,000 cap on home- stead exemptions recently passed by the U.S. Senate were adopted, our model predicts that there would be only a negligible effect on the number of é lings. We é nd little support for the nonstrategic model of bankruptcy which pre- dicts that households é le when adverse events occur which reduce their ability to repay. Fi- nally, controlling for state and time é xed ef- fects, our model shows that households are more likely to é le for bankruptcy if they live in districts with higher aggregate é ling rates. I. U.S. Personal Bankruptcy Law

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