The Impact of Bankruptcy Exemptions for Retirement Assets
When filing for personal bankruptcy, an individual can, in almost all cases, claim an exemption for retirement assets. Using the Survey of Consumer Finances from 2007 and 2010, we test the theory that highly educated or financially sophisticated households allocate more resources to retirement assets under conditions of higher probability of filing for personal bankruptcy. This hypothesis stems from the concept of asset sheltering, in which an individual will demonstrate a preference for assets that are exempt from a particular risk.
To address our hypothesis, we run a Heckman model on the Survey of Consumer Finances data. Our results provide evidence to match our theory for only highly educated or financially sophisticated individuals, conditional on owning retirement assets. That is, we observe highly educated and financially sophisticated households allocate more resources to retirement accounts when they are at higher risk for bankruptcy. Other characteristic groups do not demonstrate a similarly strong relationship between the probability of filing for bankruptcy and the level of retirement assets.