Does Bankruptcy Protection Affect Asset Prices? Evidence from changes in Homestead Exemptions

TL;DR

This study investigates how changes in bankruptcy protection laws, specifically homestead exemptions, influence house prices, revealing significant effects before 2005 that diminish afterward, with variations across locations.

Contribution

It provides empirical evidence on the causal impact of bankruptcy protection changes on asset prices using a natural experiment from exemption law modifications.

Findings

Large exemption increases raised house prices by 3% before 2005

Smaller, inflation-adjusted exemption changes had no effect

The effect disappeared after the 2005 BAPCPA law

Abstract

Does the ability to protect an asset from unsecured creditors affect its price? This paper identifies the impact of bankruptcy protection on house prices using 139 changes in homestead exemptions. Large increases in the homestead exemption raised house prices 3% before 2005. Smaller exemption increases, to adjust for inflation, did not affect house prices. The effect disappeared after BAPCPA, a 2005 federal law designed to prevent bankruptcy abuse. The effect was bigger in inelastic locations.