Consumer Bankruptcy Research Articles

Credit Markets, Exemptions, and Households with Nothing to Exempt

American bankruptcy law has offered a fresh start in every state for over one hundred years. As a result, econometric studies of consumer bankruptcy often focus on one of the few aspects of the law that has varied significantly across time and across states: exemptions. Professors Gropp, Scholz and White published the first article to test the effect of exemptions on credit markets. Consistent with theory, they found that residents of states with larger exemptions pay higher interest rates than those in states with lower exemptions and face an increased probability that they will be denied credit. These effects were most pronounced for poor households. This result is surprising because exemptions only allow a household to keep what it has. The difference between a $100,000 exemption and an exemption with no dollar limit should not matter if the household has little or no assets to exempt. This essay examines alternative explanations for why exemptions appear to have a disproportionate impact on the poor. Unfortunately, however, none of these alternative explanations proves entirely satisfactory.

The Evolution of Bankruptcy Stigma

Historically, individuals who file for bankruptcy protection have been viewed harshly by society. The negative perception of bankrupts was manifested in the punitive measures employed against bankruptcy petitioners, in the degrading public rituals directed at them, and in the contemptuous discourse used by officials to refer to the bankrupts. This traditional negative image of bankrupts was shared in colonial America, and vigorously continued throughout the Victorian era and into the 20th century. By the 1960s, a number of critics began to voice their concerns about the dramatic rise in consumer bankruptcy filings in the United States. The critics have mostly attributed the increase in filings to an alleged decline both in morals and in the shame associated with bankruptcy. Charges of the fading stigma of bankruptcy have recently intensified. A number of recent studies have attempted to corroborate assertions of the declining stigma of bankruptcy through the use of indirect variables as proxies. These attempts to measure bankruptcy stigma have been roundly criticized. The disapproval centers mainly on the studies’ failure to directly measure changes in public perception of bankruptcy. This study attempts to measure the evolution of stigma in bankruptcy by addressing the methodological concerns attributed to previous empirical studies on this subject. Rather than measuring bankruptcy stigma through the examination of indirect bankruptcy stigma proxies or through the questioning of former petitioners, this study measures evolving public perceptions about bankruptcy by examining the expressed sentiments of the general public. To ascertain whether the negative image of bankrupts has eroded in the United States over the past century and a half, 171 newspaper articles published between 1864 and 2002 about personal bankruptcy were examined for content. Examination of the content of personal bankruptcy related newspaper articles provides valuable information about the evolution of public perceptions of bankrupts during that period. This study detected a noticeable shift, beginning in the 1960s, in public attitudes towards individuals filing for personal bankruptcy. However, it did not find that the changing public perception necessarily prompted an increase in the bankruptcy filings.

Theories of Overindebtedness: Interaction of Structure and Culture

Consumer bankruptcy scholars typically stress either a structural or a cultural account of individuals’ problems with debt. Drawing on the history of poverty research, this article argues that research on consumer overindebtedness and bankruptcy should avoid the pitfall of seeing structural and cultural factors as opposing explanations. Deregulation of the credit industry and an incomplete social safety net are key structural conditions that lead to a culture hospitable to overindebtedness. Furthermore, the interaction of structure and culture has practical policy implications. Structural changes such as interest-rate deregulation inevitably transform both business and consumer culture. Policies designed to create a different consumer culture will have a hard time when pitted against strong structural causes of overindebtedness. At a minimum, efforts to create a culture of personal financial responsibility need a strong structural base, such as public education starting at a young age, and could easily require a generation or more to take hold.

Conservative Economics and Optimal Consumer Bankruptcy Policy

In this paper, Professor Wiggins explores the relationship between conservative economic theories and major bankruptcy reforms recently enacted by the United States Congress. First, she describes three key components of conservative economic theory as advanced by the Bush Administration and conservative scholars. These include: (1) a strong preference for private ordering over public ordering, (2) the promotion of private property as a means to expand personal freedom and liberty, and (3) the encouragement of individual risk internalization. Next, she describes two theoretical components of the new bankruptcy reforms. These include: (1) a preference for creditor collection over debt relief and (2) the promotion of individual risk internalization. Then Professor Wiggins examines two questions: First, is there meaningful theoretical symmetry between conservative economics and the new bankruptcy law? Second, is there significant operational symmetry between the two? The paper suggests theoretical convergence for two reasons: First, both conservative economics and the new bankruptcy law aim to promote private bargains over administratively adjusted ones. Second, both seek to force individuals to absorb more of the risks of financial decision-making. The paper suggests, however, that at the operational level there exists significant divergence between the aims of conservative economics and the predicted consequences of the new law. Professor Wiggins concludes, among other things, that economic conservatives should pay more rigorous attention to personal bankruptcy policy because operational asymmetry between their theories and the new legislation could blunt their ambitious economic agenda for American consumers.

When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings

Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors’ best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer’s ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings

Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors' best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer's ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

The Hidden Life of Consumer Bankruptcy Reform: Danger Signs for the New U.S. Law from Unexpected Parallels in the Netherlands

This Article takes advantage of a rare double opportunity to break new ground in commercial, consumer, and comparative law. First, it offers one of the first detailed analyses of key elements of the new U.S. consumer bankruptcy reform law, which will go into effect on October 17, 2005. Second, this Article offers a unique perspective on the new law in light of a curious and surprising discovery: It turns out that the U.S. consumer bankruptcy system as reformed will resemble in many critical respects the consumer bankruptcy system in place for the past six years in the Netherlands. As a result of this serendipitous U.S.-Dutch convergence, years of experience under the Dutch consumer debt relief system can serve as a sort of crystal ball, providing a rare glimpse into the future of the new U.S. system. This Article describes both the law in books as well as the law in action as it has developed in the Netherlands in recent years. The Dutch law on the ground has diverged in significant ways from legislative expectations, and such divergences might well be repeated - for better or worse - in the United States in coming years. In particular, several key similarities and distinctions between the Dutch and U.S. systems reveal latent weaknesses and portend an impending breakdown in the credit counseling and means testing parts of our new system. A comparative view of recent Dutch developments offers not only cause for concern for coming problems, however, but also hope for some effective solutions.

Educating and empowering consumers to avoid bankruptcy

The US has the highest consumer bankruptcy rate in the world and Utah is the state with the highest rate. Bankruptcy filings are rising rapidly due to uninsured medical expenses, job loss, family break-up and rising consumer and mortgage debt burdens. Lending standards are extremely lax among mainstream creditors while predatory and sub-prime lending are growing. Utah State University Extension is addressing this problem by creating a new Extension educator position to focus on financial education and by training county Extension educators to mount an extensive consumer education campaign. The ‘Take Charge of Your Money’ programme, developed by the Extension specialist, is being taught throughout the state by satellite distance education. Each educator is being trained to use the PowerPay debt reduction software developed by two Utah Extension educators. As part of the emphasis on empowerment, consumers are being taught to make their own decisions on debt load rather than accepting credit because it is available. Heavy dependence of lenders on credit scores mean consumers are taking on debt that they do not have the cash flow to repay. Grant money available from the state was used to provide training for an Extension bankruptcy prevention team and to provide funding for laptop computers for PowerPay so educators can take the programme to the citizens at county fairs and other public events. While it is too soon to measure the results of the programme, Utah State University's Cooperative Extension project is an example of an aggressive response to the highest bankruptcy rate in the nation. The bankruptcy prevention team is an example of the power of the Extension Service to extend the resources of the university to improve the quality of life for the citizens of the state.

The Position of Family Sureties within the Framework of Protection for Consumer Debtors in European Union Member States

Different approaches to the protection of sureties are currently taken in the European Union member states. A consideration of these different levels of protection requires an examination of social welfare law, contract law and bankruptcy law. This consideration is important because different approaches to surety protection represent potential barriers to the integration of the credit market, as envisaged under the draft Directive on consumer credit. The draft Directive may eliminate some of these barriers, but not others. In addition the Directive also has the potential to bring other, negative, consequences. If the Directive is successful it may have a significant impact on the level of over-indebtedness among consumers and, consequently, there will be a need to monitor the adequacy of consumer bankruptcy laws in the member states, in particular in light of any changes to the social welfare systems in operation.

Continuity, Change, and Innovation in Emerging Consumer Bankruptcy Systems: Belgium and Luxembourg

Comparative analyses of the treatment of excessive consumer debt are more relevant today than ever before, particularly given the recent overhaul of U.S. consumer bankruptcy and rapid developments in several new European consumer bankruptcy systems. This article is the next in a series designed to offer access by English speakers to such comparative analysis. Following on earlier studies of the systems in Germany and France, this article examines the recent enactment and implementation of consumer debt relief legislation in Belgium and Luxembourg. First, it explores the paradox of consumer bankruptcy in two of the least indebted states in Europe. It reveals how and why legislators overcame their reticence to adopt formal consumer debt relief procedures despite low levels of aggregate consumer indebtedness. Second, it reports on how lawmakers in Belgium and Luxembourg ultimately chose to structure formal consumer debt relief, focusing on the extent to which these new systems reflect continuity, change, and innovation in terms of the existing systems in neighboring states, especially France. In so doing, this article offers a foundation for predicting the challenges that will arise in the new, more demanding U.S. law, as well as the sort of debt relief system that will likely soon emerge as rising consumer debt becomes a problem for other countries with legal systems based on the French civil law model, such as Spain, Portugal, and a number of South American states. The first few years of experience with consumer debt relief systems in Belgium and Luxembourg show that such procedures need not be overly debtor-friendly to be effective, and they need not undermine dedication to the sanctity of contracts in a civil law system.

Behavioral Economics, Overindebtedness & Comparative Consumer Bankruptcy: Searching for Causes and Evaluating Solutions

In this paper, I draw on the insights of behavioral economics to explain the rise of consumer debt and analyze the potential of several emerging European consumer debt relief systems in preventing excessive consumer borrowing. First, I submit that behavioral economics offers compelling explanations for some of the reasons why consumers get themselves into financial trouble despite the obvious dangers of over-borrowing and over-spending. Consequently, I propose that behavioral economics might also indicate which legislative models of consumer debt relief might be most effective, not only in treating, but also in combating the growing problem of excessive consumer debt. Drawing on my recent studies of the operation of the new consumer debt relief systems in Germany, France, Belgium, and Luxembourg (and my initial observations on the system in the Netherlands), I argue that some aspects of these systems are likely to be more effective - and others may even be counterproductive - in achieving the often-stated European goals of imparting positive lessons to consumers about personal responsibility and payment morality. At least from the perspective of behavioral economics, the German system seems to emerge as the most potentially successful system, although other systems seem to be moving in the right direction in many areas.

Global Credit Card Use and Debt: Policy Issues and Regulatory Responses

The rise of card-based payments has transformed the landscape of payments in the last half century, from one dominated by government-supported paper-based payments to one dominated by wholly private systems. The rise of those payments presents a number of policy problems, the most serious of which is the empirically demonstrable likelihood that use of the cards here and elsewhere contributes to an undue level of consumer credit and that borrowing on the cards contributes to a rise in the level of consumer bankruptcy. Because increasing financial distress imposes substantial externalities on the economies in which it occurs, the global rise of the credit card poses serious policy questions. To understand how policymakers should respond, it is important to start by recognizing the powerful efficiencies that cards bring to payment systems, and how those efficiencies have driven the globalization of the payment card. Although the existing pattern shows great variation from country to country, regulators cannot be sure that the variations will persist. Building on existing historical research and on detailed contemporaneous data about the patterns of usage around the world, I show that the differences reflect the youth of the system, and the fact that few countries were as well suited to the rapid takeup of credit cards as the United States. Thus, the United States has developed an almost uniquely unitary payment system in which the credit card is both the dominant borrowing vehicle and the electronic payment instrument of choice. The pressures of globalization are rapidly driving convergence in card usage, except in those countries that have adopted substantial to slow the growth of cards. Whether those speed bumps will deflect other countries from the problems faced in the United States remains an open question. The natural question, then, is what policies will be useful to confine the problems related to credit cards without creating undue inefficiencies in retail payment systems. The ideal response would be one that drove the United States closer to the pattern evident in other countries, encouraging debit cards so as to protect the cost savings of electronic payments without the externalities generated by credit card usage. It is not easy, however, to devise policy responses that fit that goal. The closing part of this paper analyzes several different reforms that might be useful to policymakers of different perspectives: (a) permitting merchant credit card surcharges; (b) barring affinity programs, especially those that are conditioned on borrowing; (c) barring marketing to minors; (d) reorganizing the disclosure system to focus on the behavioral problems that make cards problematic; and (e) banning a few provisions that unacceptably shift costs from the card industry to the rest of society. Among other things, this suggests a shift in emphasis away from disclosures in account agreements to disclosures at the point of sale. Thus, for example, I reject recent proposals to provide enhanced disclosures for universal default provisions. On the contrary, I argue that those provisions should be banned from credit card agreements entirely, with a view to causing card issuers to limit the credit they extend to those that are demonstrably in financial distress.

Institutions, Incentives, and Consumer Bankruptcy Reform

Consumer bankruptcy filing rates have soared during the past 25 years. From 225,000 filings in 1979, consumer bankruptcies topped 1.5 million during 2004. This relentless upward trend is striking in light of the generally high prosperity, low interest rates, and low unemployment during that period. In response to this anomaly of ever-upward bankruptcy filing rates during a period of economic prosperity, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which fundamentally rebalances the consumer bankruptcy system by creating new safeguards against fraudulent and abusive filings. Although BAPCPA drew broad bipartisan support on Capitol Hill, it is controversial within the academy. Critics have argued that these reforms are unnecessary and punitive, and that private market adjustments such as higher interest rates and more restrictive credit rationing are adequate policy responses to the problem of rising bankruptcy filings without the need for legislative reform. These criticisms are misplaced, and fail to appreciate the causes of the consumer bankruptcy crisis and the appropriate responses to it. Scholars have previously identified two models of the consumer bankruptcy process, the or distress model and the economic incentives model. Neither model, however, can explain the observed bankruptcy filing patterns of recent decades. This article offers a new model of consumer bankruptcy rooted in New Institutional Economics that explains the rise in consumer bankruptcy filings as reflecting changes in the institutions, incentives, and constraints surrounding the consumer bankruptcy filing decision. It is argued that this new model of consumer bankruptcy is both theoretically and empirically superior to the traditional model. The demise of the traditional model, which has dominated bankruptcy scholarship for a century, has created a need for a new theory of consumer bankruptcy filings that can better explain the observed data. The model offered here fills that gap. This article identifies three institutional factors that can explain the observed rise in bankruptcy filings over the past several decades: (1) A change in the relative economic costs and benefits associated with filing bankruptcy; (2) A change in social norms regarding bankruptcy; and (3) Changes in the nature of consumer credit, toward more national and impersonal forms of consumer credit. All of these factors have tended to increase the incentives and opportunity for filing bankruptcy or reduce the constraints imposed on filing bankruptcy. In contrast to the traditional distress model, which purports to focus on changes in underlying household financial condition as the cause of rising bankruptcies, this model presented here examines the economic demand for bankruptcy itself, focusing on the incentives and institutions that condition consumer bankruptcy filings. The result of all of these changes has been to increase the equilibrium level of bankruptcy filings in America. In light of these changes, the article briefly discusses some policy implications of accepting this new model of consumer bankruptcy. In particular, the model described here explains the economic logic of BAPCPA, showing its key provisions to be consistent with the logic of the new model of consumer bankruptcy presented here. In addition, the article also addresses more far-reaching proposals, such efforts to reverse changes in social norms or proposals to allow contracting-around the mandatory discharge provision of current law.

Lessons from the Globalization of Consumer Bankruptcy

This essay is inspired by two recent books on comparative consumer bankruptcy: (1) Consumer Bankruptcy in Global Perspective (Oxford, U.K. and Portland, Ore.: Hart Publishing, 2003, Johanna Niemi-Kiesilainen, Iain Ramsay, and William Whitford, editors), and (2) Jacob S. Ziegel, Comparative Consumer Insolvency Regimes - A Canadian Perspective (Oxford, U.K. and Portland, Ore.: Hart Publishing, 2003). After describing the worldwide legislative frenzy in the enactment of consumer bankruptcy laws since 1984, the essay turns to three basic questions. First, the paper asks - should we care about comparative consumer bankruptcy study? That is, is the comparative study of consumer bankruptcy regimes meaningful, useful, or helpful? After expressing a number of caveats, several substantial benefits of comparative bankruptcy scholarship are noted. Second, the article examines what forces are driving the global legislative surge? Here the paper points to strong evidence that the democratisation of consumer credit, stemming from deregulation and improved technology and information, has driven up the amount of consumer credit exponentially, with a correspondingly large increase in default, thus necessitating some sort of legislative response to consumer over-indebtedeness. Finally, the paper asks whether there is a global trend of convergence, whereby legislative relief for over-indebted consumers is moving towards a common set of norms. The paper suggests that while there is some evidence of convergence, the differences still are substantial, predominate, and are likely to - and should - persist.

Impact of State Exemption Laws on Small Business Bankruptcy Decision

To provide further insights into the current debate on consumer bankruptcy, this article empirically assesses the impact of state bankruptcy exemption levels on the likelihood of small business owners filing for bankruptcy. We estimate a proportional hazard model of small business bankruptcy using a unique panel data set of over 43,000 small business credit card holders over a two‐year period from May 2000 to May 2002. Overall, our results indicate that for every $10,000 increase in a state's homestead exemptions, the risk of small business bankruptcy increases by 8%. Moreover, we also find that the likelihood of small business owners filing for bankruptcy will rise by 4% with a $1000 increase in personal property exemption levels.

消費者破産 : 破産免責を中心に(長引く不況と消費者問題)

消費者破産 : 破産免責を中心に(長引く不況と消費者問題)

The Explosive Global Growth of Personal Insolvency and the Concomitant Birth of the Study of Comparative Consumer Bankruptcy: Consumer Bankruptcy in Global Perspective, by Johanna Niemi-Kiesilainen, Lain Ramsay & William C. Whitford (eds.); Comparative Consumer Insolvency Regimes: A Canadian Perspective, by Jacob S. Ziegel

The Explosive Global Growth of Personal Insolvency and the Concomitant Birth of the Study of Comparative Consumer Bankruptcy: Consumer Bankruptcy in Global Perspective, by Johanna Niemi-Kiesilainen, Lain Ramsay & William C. Whitford (eds.); Comparative Consumer Insolvency Regimes: A Canadian Perspective, by Jacob S. Ziegel

An Economic Analysis of the Consumer Bankruptcy Crisis

Since the inception of the first permanent American bankruptcy law in 1898, the intellectual and political understanding of consumer bankruptcy has been anchored in a model that views bankruptcies as resulting from household financial distress. For much of the Twentieth Century, this traditional model provided a plausible explanation of bankruptcy filing patterns and clear normative policy implications. Moreover, the widespread intellectual and social consensus on the traditional model was reflected in the enactment of the current Bankruptcy Code in 1978, which rests on the intellectual foundation of the traditional model. To this day, leading bankruptcy scholars adhere to the traditional model and its implications. Over the past twenty-five years, however, the traditional model has broken down. During a period of unprecedented prosperity and economic stability, personal bankruptcies have soared, raising fundamental questions about the validity of the traditional model. This article argues that there has been an unacknowledged sea-change in the economics of consumer bankruptcy in America. This article first provides a scientific analysis of the traditional model to determine whether these new trends can be accommodated within the traditional model. It focuses on the key variables offered by the traditional model as components of household financial distress: first, high levels of household indebtedness, including the influences of credit cards and home mortgages; second, unemployment and downsizing; third, divorce; and fourth, health problems, health care costs, and lack of health insurance. A scientific analysis of the evidence demonstrates that although these factors can explain part of the background exogenous level of bankruptcies, as well as some regional variation in bankruptcy filing rates, they cannot explain the upward trend in bankruptcy filing rates over the past twenty-five years. The article then briefly discusses an alternative model of consumer bankruptcy that can explain the increased propensity for consumers to file bankruptcy through an examination of the legal, social, and economic institutions of the consumer bankruptcy system.

The Macroeconomics of U.S. Consumer Bankruptcy Choice: Chapter 7 or Chapter 13?

Because of the recent surge in U.S. personal defaults, Congress is currently debating bankruptcy reform legislation requiring a means test for Chapter 7 filers. This paper explores the effects of such a reform in a model where, in contrast to previous work, bankruptcy options and production are explicitly taken into account. The authors' findings indicate that means testing would not improve upon current bankruptcy provisions and, at best, leaves aggregate filings, output, and welfare unchanged. Put simply, given already existing provisions, the introduction of an efficient means test would not bind. However, we do find that a tightening of existing bankruptcy laws, in the form of lower Chapter 7 asset exemptions, can be welfare improving. Contrary to previous studies, the analysis also suggests that eliminating bankruptcy entirely would cause significant declines in both output and welfare.

Comparative Consumer Insolvency Regimes—A Canadian Perspective. By Jacob Ziegel. [Oxford and Oregon: Hart Publishing. 2003. xxviii, 168 and (Bibliography and Index) 15 pp. Hardback £35.00. IBSN 1–84113–272–1.] Consumer Bankruptcy in Global Perspective. Edited by Johanna Niemi-KiesilÄinen, Iain Ramsay and William C. Whitford. [Oxford and Oregon: Hart Publishing. 2003. x, 360 and (Index) 8 pp. Hardback £55.00. IBSN 1–84113–358–2.

Comparative Consumer Insolvency Regimes—A Canadian Perspective. By Ziegel Jacob. [Oxford and Oregon: Hart Publishing. 2003. xxviii, 168 and (Bibliography and Index) 15 pp. Hardback £35.00. IBSN 1–84113–272–1.] - Consumer Bankruptcy in Global Perspective. Edited by Niemi-KiesilÄinen Johanna, Ramsay Iain and Whitford William C.. [Oxford and Oregon: Hart Publishing. 2003. x, 360 and (Index) 8 pp. Hardback £55.00. IBSN 1–84113–358–2.] - Volume 63 Issue 2