Divorce Rates and Bankruptcy Exemption Levels in the U.S. Je Traczynski University of Wisconsin-Madison December 3, 2010
Motivation Marriage oers an individual insurance against negative income or asset value shocks through income sharing between partners Bankruptcy also oers an individual protection against the same negative income and asset shocks If bankruptcy laws become more generous to debtors as measured by an increase in bankruptcy exemption levels, this should lead to a higher divorce rate as the income protection oered by marriage is replaced by that oered by bankruptcy laws
Preview of Results I measure the generousity of bankruptcy laws using bankruptcy exemptions, the value of assets an individual may keep after declaring bankruptcy I construct a panel from 1989-2005 across U.S. of divorce rates and exemption levels with identication of eect of exemptions coming from changes within states over time I nd that increases in bankruptcy exemption levels resulted in over 200,000 additional divorces over this period This eect is quantitatively similar to that estimated for the introduction of unilateral divorce laws, though the eect of bankruptcy exemption levels is increasing over time while the persistent eect of unilateral divorce laws is estimated to be nearly zero (Wolfers, 2006)
Bankruptcy Exemptions Homestead: for one's home or housing equity Nonhome: combination of personal property exemptions, including tools of trade, cars, bank deposits, and other household goods Other exemptions include burial plots, clothing, certain types of insurance policies, and pets Hynes et al. (2004) nds that the only robust predictor of exemption levels... was historic levels of exemptions I therefore treat changes in state exemption levels as exogenous with respect to state divorce rates
Data State divorce rates: Vital Statistics of the United States, 1989-2005 State bankruptcy exemption levels: 1989-2005 from state statutes Married population estimated using March CPS Other variables: real personal income (BLS), state unemployment rate (BLS), real state median house price (Census, FHFA), state demographics (Census), max real AFDC/TANF payment (Green Book), max real EITC payment (NBER TAXSIM, Brookings) All real variables, including exemption levels, are adjusted into 2007 dollars using CPI
Federal Divorce Rate Federal Divorce Rate Divorce Rate 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 1989 1991 1993 1995 1997 1999 2001 2003 2005 Year Divorce Rate per 1000 total population Divorce Rate per 1000 married persons
State Exemption Levels
Empirical Approach divrate it = α + δ TotalEx it + κ (TotalEx it ) 2 + π X it + µ t + η i + ζ i Trend + ξ i Trend 2 + ɛ it with variables dened as: divrate Divorce Rate per 1000 married population TotalEx Real value of homestead plus nonhome exemptions X Other control variables µ Year xed eect η State xed eect Trend State-specic time trend
Controls States with unlimited household exemption: AR, FL, IA, KS, OK, SD, TX, plus DC and MN for part of sample Value of homestead exemption is set to $500,000 (in nominal terms) for states with unlimited homestead (Berkowitz and Hynes, 1999) Use exemptions as applicable to married couples in each state Exemption variable reects fungibility between exemption categories and the possibility of pre-bankruptcy planning by debtors
Estimation & Identication Use WLS (weighted by married population) for estimation to make results t largest states most closely Estimate over two samples: rst using only states with dened homestead exemptions, then using full sample Inclusion of state xed eect controls for dierences across states in bankruptcy exemption levels and divorce statutes, so identication of bankruptcy eects comes from variation within states over time
Divorce Rates - Dened Homestead States Indep. Variable Indep. Variable Total Exemption 0.0457** Percent Age 15-64 4.362* (0.0210) (2.291) Total Exemption 2-0.000751** Child Custody Guidelines -0.199 (0.000301) (0.251) Real Personal Income 0.556 No Fault Maintenance -0.0748 (0.886) (0.0829) Unemployment Rate -0.0679 Covenant Marriage -0.819*** (0.0665) (0.166) Real Median House Price -0.0293 Real Max AFDC/TANF Payment 0.000730 (0.0496) (0.00114) Homeownership Rate -3.977* Real Max EITC Payment 0.000575 (2.027) (0.000362) Percent Hispanic -43.34*** Constant 5.903 (15.96) (5.394) Percent Black 15.63 (20.04) Homestead Exemption Dened State Linear and Quadratic Trends Yes Number of obs. 674 R 2 0.948 State Dummies Yes Regression Type WLS
Divorce Rates - All States Indep. Variable Indep. Variable Total Exemption 0.0433** Percent Age 15-64 4.445** (0.0205) (2.146) Total Exemption 2-0.000565** Child Custody Guidelines -0.400 (0.000251) (0.259) Real Personal Income 0.114 No Fault Maintenance 0.0621 (0.758) (0.107) Unemployment Rate -0.0999 Covenant Marriage -0.433 (0.0618) (0.292) Real Median House Price -0.0517 Real Max AFDC/TANF Payment 0.00180 (0.0499) (0.00134) Homeownership Rate -4.658** Real Max EITC Payment 0.000606 (1.924) (0.000380) Percent Hispanic -40.28** Constant 12.49** (16.50) (5.246) Percent Black -17.42 (23.32) Homestead Exemption All State Linear and Quadratic Trends Yes Number of obs. 801 R 2 0.953 State Dummies Yes Regression Type WLS
Discussion All regressions nd same qualitative result: as exemption levels increase, the divorce rate does as well Coecients on both exemption terms are jointly signicant across specications How should we interpret these coecient estimates?
Divorce Rate Increases - All States Year Mean Total Exemption Divorce Rate Increase Additional Divorces 1989 $106,632.90 1990 $108,476.90 0.006 839 1991 $117,942.90 0.035 5,066 1992 $121,120.70 0.044 6,473 1993 $125,547.40 0.057 8,538 1994 $126,260.00 0.059 8,915 1995 $133,773.80 0.081 12,242 1996 $133,313.10 0.079 12,024 1997 $134,395.00 0.082 12,489 1998 $134,993.60 0.084 12,920 1999 $135,628.50 0.086 13,283 2000 $134,668.80 0.083 13,296 2001 $140,736.80 0.100 16,068 2002 $147,699.50 0.119 19,417 2003 $150,487.90 0.126 20,724 2004 $151,402.60 0.129 21,211 2005 $160,014.10 0.151 25,133 Total 208,637
Robustness Analysis Increases in exemption levels lead to increases in divorce rates checking for: community property laws unilateral divorce laws dened vs. unlimited homestead exemption states pre/post-bankruptcy Reform Act of 1994 Eects on divorce do not appear to be coming through increasing numbers of marginal marriages Changes in exemption levels do not have statistically signicant eect on marriage rates
Conclusion Increases in bankruptcy exemption levels lead to increases in divorce rate Changes in relative insurance level oered by marriage vs. single life Cumulative eect of exemption increases over sample period is to raise divorce rate per 1000 married persons approximately 0.151 percentage points, a 2.37% increase over its 2005 level Over the sample, the most conservative estimated increases in the divorce rate imply over 200,000 additional divorces occurred due to increases in exemptions