Abstract
Personal bankruptcy regulation embodies a core trade-off between offering debtors a "fresh start" and preserving credit market supply. This study examines how reforms in personal bankruptcy law affected bankruptcy filings and household credit markets in 13 European countries and Israel between 2001 and 2020. We measure debtor-friendliness through a composite Leniency Index and apply Local Projection models to capture dynamic effects over five years and more. Our findings show that more lenient legislation increases bankruptcy filings in the short-to-medium term, peaking after three to four years, but the effect fades within six to seven years. In contrast, leniency exerts persistent negative effects on household credit growth, with lenders tightening credit supply. Effects are dimension-specific: stigma and procedural complexity primarily drive filing behavior, while discharge conditions and procedural features significantly affect credit supply. These results underscore that debtor-friendly reforms improve individual rehabilitation but may trigger persistent credit tightening, implying that bankruptcy design must balance social protection against the risk of credit rationing and that reforming different legal dimensions can affect debtors and credit markets in fundamentally different ways.
JEL classification: G21, K35, E51
Keywords: Personal bankruptcy, Debtor protection, Bankruptcy filings, Household credit supply, Credit tightening, Regulatory anticipation, Local projections.