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An Optimal Personal Bankruptcy Procedure and Proposed Reform

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Author Info

  • Wang, H.J.
  • White, M.

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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Bibliographic 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.

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Keywords: BANKRUPTCY ; LAW;

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Citations

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Cited by:
  1. Régis Blazy & Bertrand Chopard & Eric Langlais & Ydriss Ziane, 2011. "Personal Bankruptcy Law, Fresh Starts, and Judicial Practice," EconomiX Working Papers 2011-15, University of Paris West - Nanterre la Défense, EconomiX.
  2. Ronel Elul & Narayanan Subramanian, 2002. "Forum-Shopping and Personal Bankruptcy," Journal of Financial Services Research, Springer, vol. 21(3), pages 233-255, June.
  3. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
  4. Ji, Tingting, 2004. "Essays on consumer portfolio choice and credit risk," MPRA Paper 3161, University Library of Munich, Germany.
  5. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group.
  6. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
  7. 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.
  8. Jochen Bigus & Eva-Maria Steiger, 2006. "When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings," European Journal of Law and Economics, Springer, vol. 22(3), pages 233-253, November.
  9. 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.
  10. Jeremy Berkowitz & Michelle J. White, 2002. "Bankruptcy and Small Firms' Access to Credit," NBER Working Papers 9010, National Bureau of Economic Research, Inc.
  11. Benjamin J. Keys, 2010. "The credit market consequences of job displacement," Finance and Economics Discussion Series 2010-24, Board of Governors of the Federal Reserve System (U.S.).
  12. Aloisio Araujo & Bruno Funchal, 2013. "How much should debtors be punished in case of default?," Fucape Working Papers 41, Fucape Business School.
  13. Tarun Sabarwal, 2000. "Welfare Effects of Bankruptcy," Levine's Working Paper Archive 1980, David K. Levine.
  14. Inderst, Roman, 2006. "Consumer Lending When Lenders are More Sophisticated Than Households," CEPR Discussion Papers 5410, C.E.P.R. Discussion Papers.
  15. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  16. Ji, Tingting, 2004. "Consumer Credit Delinquency And Bankruptcy Forecasting Using Advanced Econometrc Modeling," MPRA Paper 3187, University Library of Munich, Germany.
  17. Wei Fan & Michelle J. White, 2001. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Center for Financial Institutions Working Papers 01-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
  18. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
  19. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2012. "Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates," NBER Working Papers 17807, National Bureau of Economic Research, Inc.
  20. Alena Bicakova, 2007. "Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 29-66, March.
  21. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2009. "Are harsh penalties for default really better?," Working Paper 09-11, Federal Reserve Bank of Richmond.

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