An Optimal Personal Bankruptcy Procedure and Proposed Reforms

University of Michigan, Department of Economics, Working Paper No. 98-07

33 Pages Posted: 28 Dec 1998

See all articles by Hung-Jen Wang

Hung-Jen Wang

Academia Sinica - Institute of Economics

Michelle J. White

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1998

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 obligation 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 discharging some debt when debtors' ability to repay turns out to be low. However the current bankruptcy system encourages debtors to file 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 efficiency relative to the current system.

JEL Classification: G18, K2, H73

Suggested Citation

Wang, Hung-Jen and White, Michelle J., An Optimal Personal Bankruptcy Procedure and Proposed Reforms (November 1998). University of Michigan, Department of Economics, Working Paper No. 98-07. Available at SSRN: https://ssrn.com/abstract=141990 or http://dx.doi.org/10.2139/ssrn.141990

Hung-Jen Wang

Academia Sinica - Institute of Economics ( email )

Nankang, Taiwan 115
Taiwan
886 2 27822791 ext 323 (Phone)
886 2 2785 3946 (Fax)

HOME PAGE: http://www.sinica.edu.tw/~wanghj/

Michelle J. White (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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