Academic journal article The International Journal of Business and Finance Research

Personal Financial Decisions: A Study of Changes in Homestead Exemption Levels and Consumer Bankruptcy Choices

Academic journal article The International Journal of Business and Finance Research

Personal Financial Decisions: A Study of Changes in Homestead Exemption Levels and Consumer Bankruptcy Choices

Article excerpt


This study examines the impact of changes in homestead exemption levels upon the consumer bankruptcy filing rate. This relationship is examined through the creation of an interrupted time-series multiple regression model. Regression analyses were implemented using several predictor variables to detect any relationship between changes in homestead exemption levels and their effect on the applicable dependent variable. Four dependent bankruptcy variables were employed: per capita total consumer-bankruptcy filings, per capita Chapter 7 consumer-bankruptcy filing rate, per capita Chapter 13 bankruptcy filing rate, and Chapter 7 consumer-bankruptcy filings as a percentage of aggregate consumer-bankruptcy filing rates. Analyses indicate that consumers clearly prefer utilizing a Chapter 7 discharge method over Chapter 13. Additionally, these consumers do not find changes in homestead exemption levels as a source of wealth insurance to the extent that filings are significantly increased. Finally, consumer filing rates do not appear to be positively affected by the wealth effect that a risk-averse consumer might choose in bankruptcy choice.


KEYWORDS: Bankruptcy, Chapter 7, Chapter 13, Homestead Exemption


Exemptions laws occupy a long and varied history as state and federal laws developed in America. These laws grew from a basic protection of a debtor's property from legal collection practices during the 1800s to myriad additions developed and implemented at the state level during the 1900s (Hansen & Hansen, 2012). Sullivan, Warren, and Westbrook (1989) identify exemption laws as a method of protecting a debtor such that he or she has the necessary property for survival, although this is subjective across states and other jurisdictions. (Buckley & Brinig, 1998).

Bankruptcy exemption laws follow largely the same logic in protecting and supporting the basic premise of survival and are intended to protect debtor assets from liquidation with the intent of allowing the debtor and family a sustainable basis for emerging from discharge (White, 2007; Fay, Hurst, & White, 2002). Exemption protection is normally 100 percent for basic items such as clothes, but varies widely from state to state for homesteads (White, 1998). Federal exemption levels are constant across all states. Most states require that debtors use state exemption levels but some states allow the use of the federal exemption (Sullivan, Warren, & Westbrook, 1989). Under the Bankruptcy Code states may permit debtors to opt out of the federal exemptions available under the Code and choose the state exemption level, which may vary widely among states (Peterson, 2003; Grant & Koeniger, 2009). Only states that have not opted out of the federal exemption scheme and also have state exemptions lower than the federal exemptions would be impacted by the federal exemption change. In those states debtors would choose the more advantageous federal exemptions (Gropp, Scholz, & White, 2012).

The fact that state laws are not uniform and offer higher or lower levels of debtor protection, especially when expressed in terms of the value of the home (Landry, Boozer, & Lowe, 2012), suggests that variations in homestead exemption levels may affect consumer decision-making. Logically, consumers make financial decisions that maximize their financial benefit relative to cost. The decision to file consumer bankruptcy or to what extent that a consumer will file chapter 7 as opposed to chapter 13 rests in part on these financial incentives.

In fact, when considering the process of filing bankruptcy as a consumer choice, homestead exemption levels appear to impact behavior as a major financial incentive. Higher homestead exemption levels apply to both chapter of consumer bankruptcy and are positively correlated with higher filing rates (Domowitz & Sartain, 1999a). Households as well as individuals are impacted by this incentive in individual states and in the aggregate (Fay, Hurst, White, 2002), even to the extent that income inequality is positively associated with higher homestead exemption levels (Gala, Kirshner, & Volpin, 2013). …

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