Dealing with Consumer Default: Bankruptcy vs. Garnishment

43 Pages Posted: 29 Aug 2011

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Grey Gordon

Indiana University

Date Written: June 27, 2011


What are the positive and normative implications of eliminating bankruptcy protection for indebted individuals? Without bankruptcy protection, creditors can collect on defaulted debt to the extent permitted by wage garnishment laws. The elimination lowers the default premium on unsecured debt and permits low-net-worth individuals suffering bad earnings shocks to smooth consumption by borrowing. There is a large increase in consumer debt financed essentially by super-wealthy individuals, a modest drop in capital per worker, and a higher frequency of consumer default. Average welfare rises by 1 percent of consumption in perpetuity, with about 90 percent of households favoring the change.

Keywords: Default, Bankruptcy, Garnishment, Unsecured Consumer Credit

JEL Classification: C68, E21, E22, E61, K35

Suggested Citation

Chatterjee, Satyajit and Gordon, Grey, Dealing with Consumer Default: Bankruptcy vs. Garnishment (June 27, 2011). FRB of Philadelphia Working Paper No. 11-35. Available at SSRN: or

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)


Grey Gordon

Indiana University ( email )

Wylie Hall
100 S Woodlawn Ave
Bloomington, IN 47401
United States

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