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It’s not (only) personal, it’s business: personal bankruptcy exemptions and business credit

Author

Listed:
  • Rebel A Cole
  • Jason Damm
  • John Hackney
  • Masim Suleymanov

Abstract

In the USA, state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-metropolitan statistical area variation in personal bankruptcy exemptions created by state borders and a stacked regression approach to identify the spillover effects of these laws on business credit extended to small firms. Subsequent to exemption increases, we find a reduction of 1–2 percent in originations of business credit. The effect is strongest for the smallest firms, which are more financially constrained. We provide household-level evidence that both business debt and personal debt decline for borrowers whose home equity becomes covered by the exemption, suggesting an overall decrease in credit availability for small businesses. As a result, increases in exemptions lead to fewer small establishments and lower employment, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.

Suggested Citation

  • Rebel A Cole & Jason Damm & John Hackney & Masim Suleymanov, 2025. "It’s not (only) personal, it’s business: personal bankruptcy exemptions and business credit," Review of Finance, European Finance Association, vol. 29(1), pages 275-313.
  • Handle: RePEc:oup:revfin:v:29:y:2025:i:1:p:275-313.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae037
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    More about this item

    Keywords

    bank lending; bankruptcy exemption laws; business credit; debtor protection; small business lending;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General

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