Consumer Bankruptcy as Development Policy

Abstract:     
Existing scholarship on law, finance, and development generally ignores the role that consumer finance and the regulation thereof might play in promoting economic development. In fact, there are good reasons to believe that deepening of consumer finance promotes growth and/or development in emerging economies. Regulation of consumer lending may support these effects by helping to expand the availability of consumer finance and by addressing the potential costs of over-indebtedness. Consumer bankruptcy law that includes meaningful debt relief has the potential to be an effective form of such regulation. It can help promote deepening of consumer financial markets by increasing the expected insolvency returns of creditors, by making such returns more predictable, and by encouraging risk-averse consumers to obtain finance. It can also limit the amount and the costs of consumer over-indebtedness. Thus, consumer bankruptcy law should be understood as a potentially key component of development policy, and not only in the wake of widespread over-indebtedness or financial crisis. Unless it appears that a society cannot effectively administer such a regime or that social or cultural factors would keep consumers from utilizing it, emerging economies should consider adopting a consumer bankruptcy system or modernizing their existing regimes.

Number of Pages in PDF File: 43

Keywords: consumer bankruptcy, bankruptcy, development, law and development, law and finance, consumer finance, finance

JEL Classification: D11, G21, G28, G33, O00, O16

Accepted Paper Series