Credit Markets, Exemptions, and Households with Nothing to Exempt

Richard M. Hynes


American bankruptcy law has offered a "fresh start" in every state for over one hundred years. As a result, econometric studies of consumer bankruptcy often focus on one of the few aspects of the law that has varied significantly across time and across states: exemptions. Professors Gropp, Scholz and White published the first article to test the effect of exemptions on credit markets. Consistent with theory, they found that residents of states with larger exemptions pay higher interest rates than those in states with lower exemptions and face an increased probability that they will be denied credit. These effects were most pronounced for poor households. This result is surprising because exemptions only allow a household to keep what it has. The difference between a $100,000 exemption and an exemption with no dollar limit should not matter if the household has little or no assets to exempt. This essay examines alternative explanations for why exemptions appear to have a disproportionate impact on the poor. Unfortunately, however, none of these alternative explanations proves entirely satisfactory.

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