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Cui bono?

posted by Jason Kilborn

At a conference on consumer bankruptcy policy over the weekend in Athens, Greece (a place that knows all too well about consumer financial distress) and again today in class, I confronted a really nagging, fundamental problem of bankruptcy policy: For whose benefit do modern societies develop consumer bankruptcy laws, and do these systems actually deliver such benefits? In my view, the most convincing and common explanation for why existing systems offer debt relief to consumers is that relieving their suffering redounds to the greater benefit of society at large (see, e.g., section I.9, pp. 26-40, in the World Bank's Report). The problem is that I know of no empirical proof of this essential assertion. Indeed, to the contrary, I have seen well done empirical evaluations of the fresh start that suggest that, at least in the US bankruptcy system, many consumer debtors are not being reinvigorated and reintroduced into the productive, open-credit society.

I'm no empiricist, but it strikes me as potentially impossible to substantiate the premise of consumer bankruptcy policy empirically. It would be a monumental task to even formulate a research agenda for such a question. How would/could anyone ever prove that society benefits from relieving consumers of overburdening debts? Has anyone tried? Am I missing something I should be citing? Is anyone attempting to answer the question today? Any leads welcome.


"For whose benefit do modern societies develop consumer bankruptcy laws, and do these systems actually deliver such benefits?"

I don't think that's a reasonable way to formulate the question. Your thinking goes, a complex system exists, therefore someone made it for a reason. But maybe the system exists because of vicious fights over power by various factions over hundreds of years, not because planners sat down and formulated it for the greater good.

I would also note that you can't empirically prove that something is 'good' for society. That's not empiricism, that's a value judgment. Some people think that those who don't pay their debts should be in jail, some think that consumer debt is an artificial construct designed to weigh people down with neo-Victorian sensibilities. Ultimately there's a pseudo-consensus which we call law. But that doesn't get to the problem that people define good differently. If you mean that it accords to some net benefit in a utility function, well, that's a more narrow question that might be answerable, and that spells out one's assumptions clearly.

There is a great book on this very topic, which I recommend wholeheartedly.

"Debt: The First 5000 Years" by anthropologist David Graeber.

You've probably heard of it already, but worth mentioning again. As the title suggests, it charts the development of debt, as a societal concept (read stigma) to what we know now as a legal doctrine etc.

Anyway, it might focus your student's curiosity somewhat. Enjoy.

Any of Elizabeth Warren's research or books will enlighten you and inform empirically you on the benefits to society of consumer bankruptcy. Good reading !

Perhaps the most common explanation is wrong? Heidi Hurd and Ralph Brubaker are working on a book that asserts, when I last read a draft, that consumer bankruptcy are not about providing benefits to society at large but about the virtue of forgiveness. We encourage oppressive or impossible to repay debts to be forgiven because it benefits the forgiver. Here's a link to preorder their book: http://global.oup.com/academic/product/debts-and-the-demands-of-conscience-9780199642960;jsessionid=9C182BB23E1FCEED459C19CBB4D30369?cc=us&lang=en&

Well, we don't pay the taxes that we'd have to pay to create a revived system of debtors' prisons. And all the prisons that we do have are crammed full with drug traffickers, so there's no room for the deadbeats.

Who benefits? Well, there was a reason the bankruptcy clause was included in the Constitution. Significant numbers of Founders and their associates, in both business and agriculture, had either been bankrupt or close to it, but there was no orderly process to escape it and start over. They wanted to make sure that was not continued in the new country. The financiers you would expect to oppose such a plan actually considered a more or less orderly liquidation or reorganization preferable to debtors simply chucking it in and lighting out for the frontier or a completely different corner of the world. The acts and codes adopted to implement bankruptcy, being the products of the legislative process, show numerous motivations, often at cross purposes, and court procedures are little different. The result is that, barring misfeasance by a trustee or the debtor, everyone gets some sort of benefit. We hear so much wailing because no one gets what they walk in thinking they are entitled to. And at the risk of really bending the academics out of shape, if the table of contents of the Hurd-Brubaker article is any indication of its substance, this is the sort of thing that makes practitioners shake our heads and turn down the sound.

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