The impact of state -level policies and laws on state consumer -bankruptcy filing rates
Objective. The overall consumer-bankruptcy filing rate has skyrocketed over the last two decades. The causal factors for the increasing consumer-bankruptcy filing rate and reforms to limit the increased filings have been matters of great debate since the early 1990s. The proposed reforms focus largely on modifying the federal law which would implement a means-testing approach to consumer-bankruptcy relief.
This reform does not consider the fact that there is great disparity in the consumer-bankruptcy filing rate from state to state and of the type of consumer bankruptcy from state to state. This research explores the impact of state-level policies and laws on state consumer-bankruptcy filing rates while considering a host of independent variables, with particular attention paid to two independent policy variables that appear to be untested in prior literature: the lottery and tax regressivity.
Methods. This study employs two methodologies. First, multiple regression is used to examine the relationship of thirteen explanatory variables with three dependent variables: per capita Chapter 7 consumer-bankruptcy state filing rate, per capita Chapter 13 consumer-bankruptcy state filing rate, and Chapter 7 consumer-bankruptcy filings as a percentage of aggregate consumer-bankruptcy state filings. Based on these analyses, interrupted time-series analysis is used to explore the impact of policy changes in homestead exemptions and the implementation of the lottery in several states.
Results. This study found that several state-level policies (non-homestead exemption level, homestead exemption level and wages exempt from garnishment) have a limited impact on the variation in state-level consumer-bankruptcy filing rates. Tax regressivity did not show any causal relationship with consumer-bankruptcy filing rates. The analysis indicated that the lottery has a negative relationship with the Chapter 13 filing rate and a positive relationship with percentage of total filings under Chapter 7. The interrupted time-series analyses results were mixed and unable to confine these findings regarding homestead exemption or lottery.
State demographics, such as education and divorce, play a much greater role in explaining the variation in state-level consumer-bankruptcy filing rates than do state-level policies. However, it is difficult for policy makers to change state demographics because attempts to change them are long-term undertakings. This leaves policy makers with the option of means-testing reform or examining other areas of possible reform beyond the scope of this study, such as consumer credit and protection laws, minimum wage laws, laws effecting unemployment and divorce, or other social programs.