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An Optimal Personal Bankruptcy Procedure and Proposed Reform

H.J. Wang and Michelle White
Authors registered in the RePEc Author Service: Heng Wang and Hung-Jen Wang ()

Working Papers from Michigan - Center for Research on Economic & Social Theory

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.

Keywords: BANKRUPTCY; LAW (search for similar items in EconPapers)
JEL-codes: K10 K12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1998
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