When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings

28 Pages Posted: 7 Dec 2005  

Jochen Bigus

Free University Berlin, Department Accounting and Finance

Eva-Maria Steiger

Max Planck Institute of Economics, Strategic Interaction Group

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors' best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer's ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

Keywords: Consumer Bankruptcy, Debt Discharge, Bankruptcy Reform Act, Moral Hazard, Law & Economics

JEL Classification: D18, D91, K29

Suggested Citation

Bigus, Jochen and Steiger, Eva-Maria, When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings (October 2005). Available at SSRN: https://ssrn.com/abstract=868365 or http://dx.doi.org/10.2139/ssrn.868365

Jochen Bigus (Contact Author)

Free University Berlin, Department Accounting and Finance ( email )

Kaiserswerther Str. 16-18
Berlin, Berlin 14195
Germany
++49-30-83852509 (Phone)

Eva-Maria Steiger

Max Planck Institute of Economics, Strategic Interaction Group ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

HOME PAGE: http://www.econ.mpg.de/english/staff/staffpage.php?group=esi&name=steiger

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