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Personal Bankruptcy and Wage Garnishment

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Abstract

Contrary to Chapter 7 bankruptcy in the U.S., many European bankruptcy regimes are stricter and force bankrupts to repay some outstanding debt through wage garnishment. Since wage garnishment raises the effective marginal tax rate, it distorts labor supply. Explicitly modeling the garnishment period and endogenizing labor supply, this paper examines the optimal garnishment regime for Germany: optimal garnishment rates are 18 percentage points lower and the garnishment duration increases from six to ten years. Consequently, repayment during bankruptcy increases and interest rates fall. Welfare improves by 3.3%. Low-income households gain the most due to better access to cheaper credit.

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  • Florian Exler, 2019. "Personal Bankruptcy and Wage Garnishment," Vienna Economics Papers vie1908, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1908
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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