Abstract
State and federal bankruptcy laws make exemptions for the family home in personal bankruptcy proceedings. There is considerable heterogeneity across the states in the level of this exemption, and those levels have changed reasonably often since 1978. While exemptions protect debtors ex post involved in bankruptcy proceedings, they might also reduce access to credit ex ante for all debtors. The empirical literature testing this hypothesis is mixed. This paper is the first to use a true panel to test this hypothesis, thus helping to avoid the endogeneity problem which potentially plagued the earlier, cross-sectional studies. We find that increasing the homestead exemption level increases credit-rationing in the personal loan market.
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