Forum Shopping and Personal Bankruptcy

Abstract

The dramatic increase in U.S. personal bankruptcy filings of the last fifteen years has focused attention on the wide disparities between different states' personal bankruptcy exemptions. These differences have been criticized both on the grounds of equity and also because they provide an incentive to move to a state with a higher exemption before declaring bankruptcy, that is to "forum-shop." This paper focuses on the latter of these objections. Using data from the Panel Study of Income Dynamics (PSID), we estimate a Nested Logit model of the household migration decision. Our econometric approach specifically avoids the problem of endogenously induced bankruptcy filings by examining the effect of filing propensity, rather than the actual event of filing, on the tendency to migrate to a higher exemption state. We conclude that, while there is indeed evidence that considerations of bankruptcy laws do influence interstate migration, the actual effect is relatively modest. We estimate that, in any given year, roughly 4,500 moves to higher-exemption states are motivated by considerations of differences in bankruptcy laws; by way of comparison, this is roughly one quarter of the magnitude of recent estimates of welfare-induced migration. This suggests that the emphasis on differences in exemptions which has been a feature of recent attempts to reform the bankruptcy code is somewhat exaggerated.