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An Optimal Personal Bankruptcy Procedure and Proposed Reform

Author

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  • Wang, H.J.
  • White, M.

Abstract

We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. 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 obliga- tion to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for risk averse debtors by discharg- ing some debt when debtors' ability to repay turns out to be low. However the current bankruptcy system encourages debtors to le 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 show that the reform improves eciency relative to the current system.

Suggested Citation

  • Wang, H.J. & White, M., 1998. "An Optimal Personal Bankruptcy Procedure and Proposed Reform," Papers 98-07, Michigan - Center for Research on Economic & Social Theory.
    • Handle: RePEc:fth:michet:98-07
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    Keywords

    BANKRUPTCY ; LAW;

    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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