Twenty-Five Years of Consumer Bankruptcy in Continental Europe: Internalizing Negative Externalities and Humanizing Justice in Denmark

Abstract

This paper explores the problems and processes that led to the birth of consumer bankruptcy in continental Europe, a process that began in Denmark in January 1972 and culminated with the adoption of the Danish consumer debt adjustment act, Gaeldssaneringslov, on May 9, 1984. While this law is often described in primarily humanitarian terms, in the sense of offering a respite to 'hopelessly indebted' individuals, both the motivation for the law and its intended scope were not simply accretions on an already multi-layered welfare system. Instead, the law was designed primarily as a pragmatic response to economically wasteful collections activities that imposed negative externalities on debtors, creditors, and especially Danish society and state coffers; the law was intended to force creditors to internalize (or eliminate) these externalities with respect to all debtors unable to pay their debts within a reasonable period of five years. The paper also examines the growing pains of this new system. The law originally left significant administrative discretion to judges, which produced vast disparities in treatment of cases in different regions of the country. Ultimately, a reform implemented in October 2005 made the system more accessible, more unitary throughout the country, and more humane. The effects of this reform are already visible in statistical observations of the system, though significant regional variations persist. Given the striking coincidence in timing, this paper also offers brief comparative comments on the parallel design - but very different effect - of the most significant reform of U.S. consumer bankruptcy law, also effective in October 2005.