The Political Economy of Property Exemption Laws

Abstract

Exemption laws enable people who default on loans to protect certain assets from liquidation, both inside and outside bankruptcy. Every state has its own set of exemption laws, and they vary widely; the federal bankruptcy law also establishes a set of exemptions, which debtors in bankruptcy are permitted to use instead of their state's exemptions unless the state has formally opted of the federal system. We test a wide range of public interest and public choice explanations for exemption laws, using a data set consisting of the exemption laws in all states over twenty-two years, and also exploiting the opt out choice of the different states. We find that states are more likely to opt out, and to increase their exemptions in the process, if they are conservative, start with low exemptions, and have a high bankruptcy filing rate. We find little evidence for popular theories of exemptions levels; the most important factor correlated with exemption level is the historical generosity of a state's exemption laws.