The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets

38 Pages Posted: 19 Jul 2016 Last revised: 16 Oct 2016

See all articles by Vyacheslav Mikhed

Vyacheslav Mikhed

Federal Reserve Bank of Philadelphia

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law

Date Written: July, 2016

Abstract

We examine how household balance sheets and income statements interact to affect bankruptcy decisions following an exogenous income shock. For identification, we exploit government payments in one but not any other Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment (relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an income shock thus causes households that would receive lower net balance sheet benefits under bankruptcy law to select out of bankruptcy.

Keywords: Household Bankruptcy, income shocks, Balance Sheet

JEL Classification: D41, H31

Suggested Citation

Mikhed, Vyacheslav and Scholnick, Barry, The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets (July, 2016). FRB of Philadelphia Working Paper No. 16-19, Available at SSRN: https://ssrn.com/abstract=2811564

Vyacheslav Mikhed (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

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