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Debtor Protections and the Great Recession

We use 1.2 million individual credit reports and exogenous variation in state laws to assess the impact of debtor protections on household balance sheets and the macroeconomy during the Great Recession. We study bankruptcy homestead exemptions and nonrecourse mortgage protections, which respectively protect homeowners from unsecured and secured creditors. At the individual level, we find that both policies helped homeowners reduce their debt between 2008 and 2010. However, while bankruptcy homestead protections raised regional consumption and employment, non-recourse protections lowered both. These contrasting aggregate results can be explained by non-recourse laws exacerbating house price declines through an increase in foreclosures. We find no similar spillover effects on house prices from bankruptcy homestead exemptions.