The Macroeconomics of U.S. Consumer Bankruptcy Choice: Chapter 7 or Chapter 13?
37 Pages Posted: 2 Dec 2012
Date Written: September 1, 2002
Because of the recent surge in U.S. personal defaults, Congress is currently debating bankruptcy reform legislation requiring a means test for Chapter 7 filers. This paper explores the effects of such a reform in a model where, in contrast to previous work, bankruptcy options and production are explicitly taken into account. Our findings indicate that means testing would not improve upon current bankruptcy provisions and, at best, leaves aggregate filings, output, and welfare unchanged. Put simply,given already existing provisions, the introduction of an efficient means test would not bind. However, we do find that a tightening of existing bankruptcy laws, in the form of lower Chapter 7 asset exemptions, can be welfare improving. Contrary to previous studies, the analysis also suggests that eliminating bankruptcy entirely would cause significant declines in both output and welfare.
Keywords: Chapter 7 and Chapter 13 bankruptcy, borrowing constraints, means-testing
JEL Classification: D52, G18
Suggested Citation: Suggested Citation