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Bankruptcy and Consumer Behavior: Theory and Evidence from the U.S.

Source: econ.ucsd.edu
Topic: Consumer Behavior

Sort Desciption: Bankruptcy law also affects other aspects of consumer. behavior ...... High bankruptcy exemptions also have other effects on consumer behaviorthey cause ...

Content Inside: 1 Bankruptcy and Consumer Behavior: Theory and Evidence from the U.S. 1 Michelle J. White University of California San Diego and NBER 1 I am grateful to Charles Grant and Giuseppe Bertola for helpful comments and to the Economics Program at NSF for research support under grant number 0212444. 2 Introduction. This paper surveys theoretical research on personal bankruptcy presents a model of optimal bankruptcy policy discusses U.S. bankruptcy law and surveys empirical evidence from the U.S. concerning how bankruptcy affects credit markets and other consumer behaviors. Bankruptcy law is an important factor affecting consumer credit markets because whether consumers repay their loans or default depends on whether the legal system punishes defaulters and if so how severely. Bankruptcy law also affects other aspects of consumer behavior including the decision to file for bankruptcy the decision to become an entrepreneur the number of hours worked and how consumers allocate their portfolios. Unlike most of the European countries the U.S. has separate bankruptcy laws for consumer debtors versus for corporations. The U.S. bankruptcy system is also unusual in how favorably its personal bankruptcy law treats debtors and how frequently consumers default and file for bankruptcy. U.S. consumers held about $1720 billion in unsecured debt in 2002 or about $16000 per household. The annual loss rate to creditors is about 7% suggesting that losses on unsecured debt are about $120 billion per year or $1100 per household per year. 2 The number of personal bankruptcy filings per year in the U.S. increased five-fold between 1980 and 2003 from 300000 filings to more than 1500000 (see table 1). This means that nearly one and a half percent of U.S. households currently files for bankruptcy each year. Despite the increase in filing rates and the high rate of default on consumer loans the proportion of U.S. households that would benefit financially from filing ...