The characteristics of bankrupt households (such as income and asset levels) vary widely across states. This paper asks whether these variations can be attributed to state exemption laws or state garnishment laws. Using a new household-level dataset, the author finds that high exemption levels encourage high asset households to file for bankruptcy while high garnishment rates encourage low income households to file for bankruptcy. These results are supported by a theoretical model in which households choose between repayment, bankruptcy, and non-response (which occurs when households simply "walk away" from their bills, allowing creditors to garnish their wages and seize their assets).
One of the interesting aspects of this study is that in addition to considering the Debtor’s options of either repayment or bankruptcy, it also looks at the impact exemption and garnishment laws have on the third option, namely the ostrich approach, where the Debtor sticks his head in the sand and take no action to deal with his debt, either living "off the grid" or suffering through garnishment and asset seizure, which the author calls "non-response". Inclusion and evaluation of this all too common non-response by Debtors to financial distress in other studies would, I think be illuminating as to the costs of bankruptcy and its comparative effectiveness.
Another interesting finding in this paper is that if all states were to enact laws allowing garnishment up to the federal maximum of 25% of wages, bankruptcy filings would increase nationwide by 13%. It would be expected such an increase in bankruptcies would be greatest the five states currently without any substantial garnishment, viz. Florida, North Carolina, Pennsylvania, South Carolina, and Texas.
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