Economic Quarterly

2001

 

Spring 2001

To Forgive or Not to Forgive: An Analysis of U.S. Consumer Bankruptcy Choices

Wenli Li

An analysis of existing U.S. bankruptcy law and its provisions suggests that they encourage people to borrow to save and that, in particular, Chapter 13 discourages labor effort. Evidently, three proposed reforms to the law—namely, a decrease in the asset exemption level, a reduction in wage garnishment, and an income mandate for Chapter 13—would encourage agents to select Chapter 13 relief over Chapter 7, albeit at the cost of lost efficiency to the whole economy. But whereas the three reforms possess the foregoing similarity, they nevertheless differ in their impact on different groups of people. Specifically, stricter asset exemption levels would hit those with medium assets and medium labor income, whereas falls in wage garnishment would benefit those with high assets and high income just as income mandates would affect those with low assets and medium income.

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