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Quantifying the Benefits of the Fresh Start

posted by Jason Kilborn

I recently discovered a not-so-new paper that provides a useful answer to a question I've asked before:  Who benefits from consumer bankruptcy, and to what degree? This is a real challenge for policy-making, and well-supported answers are essential to greasing the wheels of reform.

In this paper, Will Dobbie (Princeton) and Jae Song (SSA) use a creative technique, comparing the financial outcomes of Chapter 13 debtors whose plans were--and were not--confirmed to probe the positive effects of access to such relief (apparently whether or not the payment plan is successfully completed). Successful access to Chapter 13 protection led to over $5000 in increased annual earnings in the first ten post-filing years and a 3.5 percentage-point increase in employment over the first five post-filing years, including a nearly 3 percentage-point increase in self employment. Access to relief also reduced the receipt of "welfare" benefits and increased retirement savings contributions.  Most striking, access to debt relief reduced mortality (presumably by decreasing stress) during this period by almost 2 percentage points--which is a 47.5% decrease from the mean for filers whose cases were dismissed, largely attributable to a large, positive effect on filers over 60. The authors attribute these gains to an increased incentive to work and produce earnings and  reduction in economic instability and stress.

The results of this study are among the many individual and societal benefits of consumer bankruptcy commonly identified in legal literature. Indeed, the authors conclude that "individual debt relief is much more likely to be welfare-improving than previously realized"--and these instances of individual welfare redound in direct ways to the state and society as a whole. While I can see a variety of quibbles that empirical scholars might have with this study, the results provide fairly solid support for the most common working theories of relief, and they offer even greater comfort for policymakers searching for reasons to introduce or expand individual debt relief.


I enjoyed reading a prior version of this paper. Thanks for sharing it to a wider audience.

Curiously, the December 2013 version that I previously read found Ch. 13 protection increased annual earnings by $6,747, and decreased the five-year mortality rate by only 1.1 percentage points. Unless you have thoughts on the shift, I guess I'll have to read it again to understand why there was such a drastic shift in these two reported effects.

Hmnmmm. The version I read is dated January 2013. I wonder if the authors have revised their figures later. I'm the wrong person to ask about statistical analysis, unfortunately, but one way or another, the core point is that consumer bankruptcy conveys significant benefits that have been (arguably) under-estimated in other literature. That's good news for people talking to policymakers about adopting these "revolutionary" new laws for the first time.

By the way, side rant: Many versions of this paper on the internet, including on SSRN, are behind paywalls. I HATE it when people post abstracts on SSRN for papers that are inaccessible for free. :-( Maybe the latest version of the paper is hiding out there behind a paywall?

Good luck getting the US Trustees, especially the Chapter 13 Trustees, to acknowledge this reality. They consider their job description to be only to protect the unsecureds and to throw debtors to the wolves if it looks like that isn't happening. Between DOJ's biases expressed through the trustees, Congress passing BAPCPA, and Scalia leading his jihad against equitable remedies, debtors face a trifecta of government branches that believe bankruptcy is not a fresh start but rather a means of snapping deadbeats around and chaining them back up inside the workhouse.

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