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Consumer bankruptcy: a fresh start

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  • Igor Livshits
  • James MacGee
  • Michele Tertilt

Abstract

American consumer bankruptcy provides for a Fresh Start through the discharge of a household’s debt. Until recently, many European countries specified a No Fresh Start policy of life-long liability for debt. The trade-off between these two policies is that while Fresh Start provides insurance across states, it drives up interest rates and thereby makes life-cycle smoothing more difficult. This paper quantitatively compares these bankruptcy rules using a life-cycle model with incomplete markets calibrated to the U.S. and Germany. A key innovation is that households face idiosyncratic uncertainty about their net asset holdings (expense shocks) and labor income. We find that expense uncertainty plays a key role in evaluating consumer bankruptcy laws.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 617.

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Date of creation: 2003
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Handle: RePEc:fip:fedmwp:617

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References

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  1. Alexopoulos, Michelle & Domowitz, Ian, 1998. "Personal Liabilities and Bankruptcy Reform: An International Perspective," International Finance, Wiley Blackwell, vol. 1(1), pages 127-59, October.
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  8. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
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  20. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
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