83 Pages Posted: 5 Mar 2003
Date Written: February 21, 2003
This article questions the conventional wisdom that bankruptcy and other forms of debt relief unfairly allow the wealthy to retain more resources than the poor. The central insight is that if bankruptcy provides insurance otherwise unavailable because of market failures, an ideal bankruptcy system would embrace significant inequality in post-bankruptcy standards of living. When choosing insurance policies, the wealthy generally choose contracts that ensure their high standards of living. Though others envy these benefits, they do not wish to pay the premiums that these policies require. To the extent that credit markets force a debtor to pay premiums (higher interest rates) for the debt relief she may receive, forcing all debtors to accept the same standard of living after default forces each debtor to accept the same Procrustean insurance with a benefit too meager for some and premiums too dear for others. This argument requires strong assumptions that reasonable minds may reject. However, if one rejects these assumptions, one must question not only the debt relief secured by the once wealthy, but also the debt relief offered to the middle class.
JEL Classification: I38, K00, K20
Suggested Citation: Suggested Citation