Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates
This paper estimates the extent to which legal fees prevent liquidity-constrained households from declaring bankruptcy. To do so, it studies how the 2001 and 2008 tax rebates affected consumer bankruptcy filings. We exploit the randomized timing of the rebate checks and estimate that the rebates caused a significant, short-run increase in consumer bankruptcies in both years, with larger effects in 2008 when the rebates were more generous and more widely distributed. Using hand-collected data from individual bankruptcy petitions, we document that the rebates caused an increase in the average liabilities and the liabilities-to-income ratios of filers.
We are grateful to Ben Keys, Erik Hurst, Neale Mahoney, Nick Souleles, and seminar participants at the University of California at Los Angeles, University of Illinois, University of Miami, the Olin School of Business, the Federal Reserve Bank of Philadelphia, and Columbia University for useful feedback. We thank Ido Moskovich and Anthony Vashevko for helpful research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
“Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates,” with Matthew Notowidigdo and Jialan Wang. Review of Economics and Statistics, accepted. Manuscript. Appendix. Featured in the June 2012 NBER Digest Media Coverage: Los Angeles Times; Huffington Post; Vox; Forbes; CNN. Older Version: NBER Working Paper #17807 citation courtesy of