Intergenerational Effects of Debt Relief: Evidence from Bankruptcy Protection

Using bankruptcy filing information on parents matched with administrative data on their children, along with judicial leniency as an instrumental variable, we examine the effect of parental bankruptcy protection on children’s income, intergenerational mobility, and homeownership. We find that children whose parents receive Chapter 13 bankruptcy protection experience a significant increase in lifetime income. For every dollar of debt relief granted, these children gain two dollars in adjusted present value of lifetime earnings. Furthermore, they are more likely to rank in the top tercile of the income distribution, driven by increased intergenerational upward mobility, and are over five percentage points more likely to own a home by age thirty. Our findings suggest that bankruptcy protection and debt relief play an important role in fostering intergenerational mobility for low-income distressed households. Our results are most consistent with three mechanisms: protection of assets (e.g., house), higher investment in children’s education and skill-development, and avoiding forced geographic mobility. We do not find support for neighborhood effects driving our estimates.