Consumer bankruptcy and chapter choice: State panel evidence

Between 1985 and 1996, the number of personal bankruptcy cases filed annual ly in the United States rose from 341,000 to 1.1 million, and the rate of b ankruptcies per 100, 000 adults increased from 203 to 596. By state, bankru ptcy rates vary from a low of 147 in Hawaii to a high of 956 in Tennessee. A controversial aspect of bankruptcy policy is the discharge of debts permi tted under Chapter 7, in contrast to Chapter 13, where the debtor agrees to repay all or a portion of unsecured debt over a 3-5-year period. This pape r examines empirically the determinants of the frequency with which individ uals choose Chapter 13 relative to Chapter 7 (chapter choice). The panel da ta set is a cross section of states and the District of Columbia for the 8- year period from fiscal year 1989 to 1996. The empirical model and policy a pplication focus on the importance of several laws for bankruptcy decisions , and legal variables are included for each stare's Chapter 7 homestead exe mption, personal property exemptions, and garnishment laws. This study show s that both homestead exemption laws and garnishment laws are statistically significant for bankruptcy choices. Although the marginal effect of the ho mestead exemption is small, there is a large range under current laws, sugg esting that changes in this exemption are important for bankruptcy policy. (JEL K1, K4, D1, D9).