New Insights in the Determinants of Regional Variation in Bankruptcy Filing

Rates

Kelly D. EdmistonSenior Economist, FRB Kansas City

North American Meetings, RSAINovember 10, 2005

Las Vegas, NV

Personal Bankruptcies in the U.S.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

Ban

kru

ptc

ies/

10,0

00 A

mer

ican

s

Treasury (1999)

Administrative Office of the U.S.Courts

Bankruptcy Filing Rates by County, U.S., 2000

November 10, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 4

Focus

homestead exemptions social stigma legal gambling wage garnishment

November 10, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 5

Homestead Exemptions

V – EH allocated to unsecured debts

• foreclosure

Protection is afforded to all types of assets Offers consumption insurance / lowers

bankruptcy filing costs

November 10, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 6

Some high asset individuals move to high exemption states to convert assets

Exemptions that are both higher and lower than federal lead to more bankruptcies

Effect on bankruptcies is negative Effect on bankruptcies is positive Positive for 7 filings and negative for 13

filings

Homestead Exemptions: Empirical Evidence

November 10, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 7

Two approaches to measuring the effect of homestead exemptions

)649.0(119.0H

b

(1) Least Squares with White’s (1980) Correction:

(2) Two-Stage Model to Account of Endogeneity

*)765.1(680.0H

b

Stage 1

Table 3: Results, Homestead Exemptions

VariableParameter Value

(t-statistic)Variable

Parameter Value(t-statistic)

Intercept- 7,796,626*

(- 1.733)Percent White

- 5,853*

(- 1.844)

Poverty Rate- 140,452***

(- 2.891)Average Family Size

1,770,668***

(3.045)

Median House Value- 8.062***

(- 3.059)Household Median Income

- 32.52*

(- 1.905)

Wage Not Subject to Garnishment- 4,577**

(- 2.166)Households with Public Assistance

- 238,177**

(- 2.644)

Percent of Population that is Male122,891*

(1.811)Owner-Occupany Rate

- 21,184*

(- 1.954)

Median Age76,621***

(2.813)Percent GOP

- 14,540(- 1.406)

Adjusted R2 0.2063 No. Observations 51

***, **, and * indicates statistical significance at the 1, 5, and 10 percent levels, respectively.

uH

Z

;Hb X

K ~,,

~,

~2 1

ˆ~ˆ~1~

1 k

K

k kKVOC

Stage 2

Bootstrapping

Estimate by least squares:

Generate:

Sample: n observations from X, with replacement

KkHb kkkk ,,1;ˆ XEstimate:

Evaluate:

November 10, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 10

Social Stigma

Previous approaches• age (and age squared)

• geography (own state for individual) Innovations on previous approaches

• entire age distribution

• LS with regional dummies and SAR New approach

• religious adherence

Age Distribution 1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Sh

are

of F

Ilin

gs

< 25 25-34 35-44 45-54 55-64 > 65

Age Group

1991 2001

Source: Consumer Bankruptcy Project, as cited in Suein Hwang, "Mr. Hester Takes a Mall Job," The Wall Street Journal, August 6, 2004.

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

< 15

15 -

19

20 -

24

25 -

34

35 -

44

45 -

54

55 -

59

60 -

64

65 -

74

75 -

84

> 84

Age Range

Coe

ffic

ien

t V

alu

e

**

*

* indicates statistical significance at 90% confidence level or better

Age Distribution 2

Estimation of Geographic Factors and Results

RX Hb ˆ

bHb WX ˆ

***3943.6)0(

F

Least Squares with Regional Dummy Variables

SAR

***)92.18(528.0ˆ

Religious Adherence

ReligionParameter

(t-statistic)Religion

Parameter

(t-statistic)

Christian – Catholic

0.019

(0.260)Judaism

1.976**

(2.527)

Christian – Protestant

0.141**

(2.038)Eastern Religions

- 13.72***

(- 3.498)

Christian – Orthodox

0.500

(0.356)Islam

- 4.809**

(- 2.564)

Christian – LDS

0.129

(0.972)Unitarian Universalist

- 38.42***

(- 4.231)

Wage Garnishment

***)200.12(038.1 WP

Gambling in the United States, 2000

Gambling Results

VariableParameter Value

(t-statistic)

Minimum Distance to a Casino

- 0.043***

(- 5.777)

Lottery- 2.814

(- 1.195)

Card Rooms10.78***

(2.616)

Race Tracks- 13.67***

(- 4.835)

Kelly D. EdmistonSenior Economist

Community Affairs DepartmentFederal Reserve Bank of Kansas City

925 Grand BoulevardKansas City, MO 64198-0001

Tel: (816) 881-2004Fax: (816) 881-2704

E-Mail: Kelly.Edmiston@kc.frb.org