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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 G. 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. Our 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 Richmond in its series Working Paper with number 02-01.

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Date of creation: 2002
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Handle: RePEc:fip:fedrwp:02-01

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Keywords: Bankruptcy;

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Cited by:
  1. Simon Janßen & Uschi Backes-Gellner, 2009. "Skill Obsolescence, Vintage Effects and Changing Tasks," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 55(1), pages 83-103.
  2. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 0910, Economics Division, School of Social Sciences, University of Southampton.
  3. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  4. Marina Pavan, 2003. "Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection," Boston College Working Papers in Economics 573, Boston College Department of Economics, revised 01 May 2005.
  5. N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.

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