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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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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I3-P158.pdf
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    References listed on IDEAS

    as
    1. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 217-251.
    2. Donald Hackney & Matthew McPherson & Daniel Friesner & Candice Correia, 2010. "Domestic Support Obligations and Bankruptcy: An Analysis of Chapter 13 Filings," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(4), pages 457-458, December.
    3. Jon P. Nelson, 1999. "Consumer Bankruptcy And Chapter Choice: State Panel Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 552-566, October.
    4. Frank McIntyre & Daniel M. Sullivan & Laura Summers, 2015. "Lawyers Steer Clients Toward Lucrative Filings: Evidence from Consumer Bankruptcies," American Law and Economics Review, Oxford University Press, vol. 17(1), pages 245-289.
    5. Kartik B. Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
    6. 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.
    7. Lefgren Lars & McIntyre Frank L & Miller Michelle, 2010. "Chapter 7 or 13: Are Client or Lawyer Interests Paramount?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, September.
    8. Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, May.
    9. Ning Zhu, 2011. "Household Consumption and Personal Bankruptcy," The Journal of Legal Studies, University of Chicago Press, vol. 40(1), pages 1-37.
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    More about this item

    JEL classification:

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

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