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An Optimal Personal Bankruptcy Procedure and Proposed Reform

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Author Info
Wang, H.J.
White, M.

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Abstract

We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obliga- tion to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for risk averse debtors by discharg- ing some debt when debtors' ability to repay turns out to be low. However the current bankruptcy system encourages debtors to le for bankruptcy even when their ability to repay is high. The proposed reform maintains the insurance function of bankruptcy, but reduces debtors' incentive to take advantage of the system. Using simulation techniques, we show that the reform improves eciency relative to the current system.

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Publisher Info
Paper provided by Michigan - Center for Research on Economic & Social Theory in its series Papers with number 98-07.

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Length: 30 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:fth:michet:98-07

Contact details of provider:
Postal: UNIVERSITY OF MICHIGAN, DEPARTMENT OF ECONOMICS CENTER FOR RESEARCH ON ECONOMIC AND SOCIAL THEORY, ANN ARBOR MICHIGAN U.S.A.

For technical questions regarding this item, or to correct its listing, contact: (Thomas Krichel).

Related research
Keywords: BANKRUPTCY LAW

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Find related papers by JEL classification:
K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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  1. Inderst, Roman, 2006. "Consumer Lending When Lenders are More Sophisticated Than Households," CEPR Discussion Papers 5410, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Tarun Sabarwal, 2000. "Welfare Effects of Bankruptcy," Levine's Working Paper Archive 1980, UCLA Department of Economics. [Downloadable!]
  3. Ji, Tingting, 2004. "Essays on consumer portfolio choice and credit risk," MPRA Paper 3161, University Library of Munich, Germany. [Downloadable!]
  4. Alena Bicakova, 2007. "Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market," Economics Working Papers ECO2007/02, European University Institute. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
  6. Sherry Glied, 2003. "Health Insurance Expansions and the Content of Coverage: Is Something Better Than Nothing?," Forum for Health Economics & Policy, Berkeley Electronic Press, vol. 6(1), pages 1046-1046. [Downloadable!] (restricted)
  7. Ji, Tingting, 2004. "Consumer Credit Delinquency And Bankruptcy Forecasting Using Advanced Econometrc Modeling," MPRA Paper 3187, University Library of Munich, Germany. [Downloadable!]
  8. Wenli Li & Pierre-Daniel G. Sarte, 2002. "The macroeconomics of U.S. consumer bankruptcy choice : chapter 7 or chapter 13?," Working Paper 02-01, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  9. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Discussion Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  10. Tarun Sabarwal, 2003. "Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 3(1), pages 1060-1060. [Downloadable!] (restricted)
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