Defining the Social Insurance Function of Consumer Bankruptcy

Abstract:     
Bankruptcy scholars generally agree that consumer bankruptcy functions, at least in part, as a form of social insurance. It does so by allowing individuals to discharge unsecured debts that they incur and cannot pay as a result of the occurrence of one or more particular events or circumstances. Available data suggest that the consumer bankruptcy system primarily insures individuals against the effects of unemployment, illness, disability, and marital dissolution. But other regimes - unemployment insurance, workers' compensation, Medicare, spousal support laws, etc. - insure individuals against these circumstances as well. To the extent that legal scholars have considered the relationship between bankruptcy and these other programs, they have tended to assume that bankruptcy filings reflect failures of other social insurance programs, gaps in the social safety net. It is reasonable to believe, however, that an optimal social insurance system would allocate significant functions to bankruptcy. This Article frames basic questions that must be resolved in determining the optimal role of bankruptcy within the American social insurance system. By way of illustration, it compares the wage insurance functions of bankruptcy and unemployment insurance with respect to administrative costs, co-insurance costs, moral hazard, and effects on labor and credit markets. It also considers potential policy implications of such a comparison. These include changing the scope of benefits and/or eligibility under non-bankruptcy programs and altering the exemption rules that operate in bankruptcy. Resolving such normative questions about the relationship between bankruptcy and other social insurance programs is an essential step in evaluating the significance of current bankruptcy rates and the desirability of recent bankruptcy reforms.

Number of Pages in PDF File: 58

Keywords: bankruptcy, social insurance, unemployment insurance, workers compensation, disability insurance, Medicare, spousal support, alimony

JEL Classification: E21, D11, H53, I38, J65

Accepted Paper Series