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An Optimal Personal Bankruptcy Procedure and Proposed Reforms


  • Wang, Hung-Jen
  • White, Michelle J


We investigate a new approach to the reform of U.S. personal bankruptcy law in which Chapters 7 and 13 would be combined. 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 obligation to repay in bankruptcy on debtors' ability to pay from both sources. An important function of personal bankruptcy is to provide partial wealth insurance for risk-averse debtors by discharging some debt when debtors' ability to repay turns out to be low. However, the current bankruptcy system encourages debtors to file 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 investigate the properties of a bankruptcy reform in which both the wealth exemption and the postbankruptcy earnings exemption are optimized. We show that the proposed reform improves efficiency relative to the current system. Copyright 2000 by the University of Chicago.

Suggested Citation

  • Wang, Hung-Jen & White, Michelle J, 2000. "An Optimal Personal Bankruptcy Procedure and Proposed Reforms," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 255-286, January.
  • Handle: RePEc:ucp:jlstud:v:29:y:2000:i:1:p:255-86

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    References listed on IDEAS

    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Kathryn E. Spier, 1994. "Pretrial Bargaining and the Design of Fee-Shifting Rules," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 197-214, Summer.
    3. Chung, Tai-Yeong, 1996. "Settlement of Litigation under Rule 68: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 25(1), pages 261-286, January.
    4. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
    5. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    6. Anderson, David A, 1994. "Improving Settlement Devices: Rule 68 and Beyond," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 225-246, January.
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    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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