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

Supersedes Working Paper 14-17 — How Do Exogenous Shocks Cause Bankruptcy? Balance Sheet and Income Statement Channels.

For identification, they 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.