Asset Exemption in Bankruptcy, Access to and Cost of Credit

Mon, 01 Jan 2024 00:00:00 +0000

Research question and motivation: Under U.S. Chapter 7 bankruptcy, an individual entrepreneur has most unsecured debt discharged and only her non-exempt assets liquidated, producing an “insurance effect.” But this protection does not extend to assets voluntarily pledged as collateral, so a borrower can undo the insurance by posting sufficient collateral. The paper asks how asset exemption interacts with the decision to post collateral to shape access to and the cost of credit. The novel insight is that, because the opportunity cost of pledging collateral (forgoing the exempt assets one would otherwise keep in default) is lower for safe entrepreneurs than for risky ones, collateral becomes a more effective sorting device as exemption rises. Existing empirical work (Gropp et al. 1997; Berkowitz and White 2004; Berger et al. 2011) finds exemption reduces access and raises rates, but does not exploit the interaction between collateral and exemption.

Gianfranco Atzeni | Macro Paper Warehouse

Asset Exemption in Bankruptcy, Access to and Cost of Credit