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The macroeconomics of U.S. consumer bankruptcy choice: Chapter 7 or Chapter 13?

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  • Wenli Li
  • Pierre-Daniel Sarte

Abstract

Because of the recent surge in U.S. personal defaults, Congress is currently debating bankruptcy reform legislation requiring a means test for Chapter 7 filers. This paper explores the effects of such a reform in a model where, in contrast to previous work, bankruptcy options and production are explicitly taken into account. The authors' findings indicate that means testing would not improve upon current bankruptcy provisions and, at best, leaves aggregate filings, output, and welfare unchanged. Put simply, given already existing provisions, the introduction of an efficient means test would not bind. However, we do find that a tightening of existing bankruptcy laws, in the form of lower Chapter 7 asset exemptions, can be welfare improving. Contrary to previous studies, the analysis also suggests that eliminating bankruptcy entirely would cause significant declines in both output and welfare.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-14.

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Date of creation: 2003
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Handle: RePEc:fip:fedpwp:03-14

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Keywords: Bankruptcy;

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  1. Igor Livshits & James MacGee & Mich�le Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 402-418, March.
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Citations

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Cited by:
  1. N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.
  2. Marina Pavan, 2003. "Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection," Boston College Working Papers in Economics, Boston College Department of Economics 573, Boston College Department of Economics, revised 01 May 2005.
  3. Simon Janssen & Uschi Backes-Gellner, 2008. "Skill obsolescence, vintage effects and changing tasks," Economics of Education Working Paper Series, University of Zurich, Institute for Strategy and Business Economics (ISU) 0063, University of Zurich, Institute for Strategy and Business Economics (ISU).
  4. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  5. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 0910, Economics Division, School of Social Sciences, University of Southampton.

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