The Macroeconomics of U.S. Consumer Bankruptcy Choice: Chapter 7 or Chapter 13?

FRB of Philadelphia Working Paper No. 03-14

39 Pages Posted: 23 Jul 2004

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: September 2002

Abstract

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. The authors' 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: Macroeconomics, consumer bankruptcy, chapter 7, chapter 11

JEL Classification: D52, G18

Suggested Citation

Li, Wenli and Sarte, Pierre-Daniel, The Macroeconomics of U.S. Consumer Bankruptcy Choice: Chapter 7 or Chapter 13? (September 2002). FRB of Philadelphia Working Paper No. 03-14. Available at SSRN: https://ssrn.com/abstract=567843 or http://dx.doi.org/10.2139/ssrn.567843

Wenli Li (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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