The Financial Benefits of Bankruptcy

Earlier this week I wrote about the extensive data that have been made available to me by the Canadian bankruptcy regulator, the Office of the Superintendent of Bankruptcy (OSB). The main element of the database is the balance sheet from every electronically filed consumer bankruptcy in Canada from 2005 to 2010.

One of the first things we (my PhD Student Vyacheslav Mikhed and I) have tried to do with this data is to measure the Financial Benefits of Bankruptcy (FBB) as reflected in the individual filer’s balance sheet.

The idea of FBB is taken from the paper of Fay, Hurst and White (American Economic Review, 2002, specifically page 708) and is simply the idea of measuring how much the bankruptcy filer gains through the discharge of unsecured debt minus the non-exempt assets the filer loses in bankruptcy. The larger the gains through unsecured debt discharged and the smaller the loss of non-exempt assets, the larger will be the financial benefits of bankruptcy to each individual filer.

A Federal Bankruptcy Regulator

I was very interested to read a Credit Slips blog post a few weeks ago by Melissa Jacoby concerning the recent paper of Rafael Pardo and Kathryn Watts. The key point of that paper is whether bankruptcy in the US should be regulated by a federal agency, or whether bankruptcy policy should be made by the courts. In their abstract Pardo and Watts comment that: “The current system of administration of the Bankruptcy Code is highly anomalous. It stands as one of the few major federal civil statutory regimes administered almost exclusively through adjudication in the courts, not through a federal regulatory agency. This means that rather than fitting bankruptcy into a regulatory model, Congress has chosen to give the courts primary interpretive authority in the field of bankruptcy”.

I read this blog post and paper with interest, not because I am a lawyer – I am an empirically focused economist – but because I have recently been working with the Canadian Office of the Superintendent of Bankruptcy (OSB). The OSB is exactly the kind of federal bankruptcy regulatory agency that Pardo and Watts describe as not existing in the US. (Full Disclosure: The OSB is partly funding my research and provides me with data, but nothing I say reflects the views of the OSB).

Bankruptcy in the Neighborhood

I am very happy Bob Lawless invited me to be a guest blogger on Credit Slips for the next few days. I have been reading Credit Slips for a long time and I really enjoy it.

In the next few days I would like to talk about some of my economics based research involving consumer bankruptcy in Canada. What I try to do in my research is to exploit some of the data available in the Canadian system to answer questions that may be harder to answer using US based data.

For example, in one of my recent papers I try to provide new evidence on a longstanding debate in the bankruptcy literature by exploiting a seemingly innocuous Canadian institution – the Canadian post code system.

The question involves the impact that your neighbors declaring bankruptcy have on your declaring bankruptcy. There are a variety of possible channels through which neighbors can influence individuals in the bankruptcy context. It is possible that neighbor’s behavior can influence perceptions of the social stigma of bankruptcy. If many of your neighbors are filing for bankruptcy, then you may feel that there is less stigma involved, which could encourage you to file yourself (“because everybody else is doing it”). Alternatively, it may be possible that by talking to your neighbors who have previously filed, you can learn about the process involved in bankruptcy (“look how easy bankruptcy is”), which may also encourage you to file.