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Do Debtors Have an Obvious Financial Rationale for Filing a Chapter 13 Bankruptcy Petition?

Author

Listed:
  • Donald D. Hackney

    (Gonzaga University)

  • Daniel Friesner

    (North Dakota State University)

  • Matthew Q. McPherson

    (Gonzaga University)

Abstract

The decision to file for bankruptcy, and more specifically to file for Chapter 13 bankruptcy protection, is a major financial decision that impacts the debtor's financial well-being for several years. Under financial economic theory, debtors should make informed choices, which include having clear rationale for making specific chapter filing choices. Based on those choices, expected outcomes accrue to the debtor. Moreover, rationales for the debtor's decisions should be revealed as debtors disclose their assets, liabilities, income and other salient characteristics in the filing process. The common rationales, as characterized by the outcomes accruing from making a choice to file under Chapter 13, are explored in this manuscript. Using a sample of nearly 300 Chapter 13 bankruptcy filings in the Eastern Washington Bankruptcy Court District, approximately 32 percent of all filers accrue no obvious financial benefit from filing under Chapter 13, and would be been better off financially by filing under Chapter 7. These filings are typically attributed to local norms and business practices that occur within a community, also known as “legal culture†. This analysis suggests that legal culture plays a very significant role in Chapter 13 bankruptcy chapter filing choices.

Suggested Citation

  • Donald D. Hackney & Daniel Friesner & Matthew Q. McPherson, 2015. "Do Debtors Have an Obvious Financial Rationale for Filing a Chapter 13 Bankruptcy Petition?," Economics Bulletin, AccessEcon, vol. 35(3), pages 1572-1588.
  • Handle: RePEc:ebl:ecbull:eb-14-00619
    as

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    References listed on IDEAS

    as
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    JEL classification:

    • K3 - Law and Economics - - Other Substantive Areas of Law

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