Consumer bankruptcy: a fresh start

Igor Livshits, James (Jim) MacGee () and Michele Tertilt

No 617, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: American consumer bankruptcy provides for a Fresh Start through the discharge of a household?s debt. Until recently, many European countries specified a No Fresh Start policy of life-long liability for debt. The trade-off between these two policies is that while Fresh Start provides insurance across states, it drives up interest rates and thereby makes life-cycle smoothing more difficult. This paper quantitatively compares these bankruptcy rules using a life-cycle model with incomplete markets calibrated to the U.S. and Germany. A key innovation is that households face idiosyncratic uncertainty about their net asset holdings (expense shocks) and labor income. We find that expense uncertainty plays a key role in evaluating consumer bankruptcy laws.

Date: 2003
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Related works:
Journal Article: Consumer Bankruptcy: A Fresh Start (2007)
Working Paper: Consumer Bankruptcy: A Fresh Start (2005)
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