Consumer Bankruptcy: A Fresh Start
- Topics:
- Bankruptcies,
- Bankruptcy,
- Commercial Lending
- Tags:
- American Consumer Bankruptcy,
- Bankruptcy,
- Business Operations,
- Federal Reserve Bank Of Minneapolis,
- Litigation
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Overview: American consumer bankruptcy provides for a Fresh Start through the discharge of a household's debt. Until recently, many European countries specified a No Fresh Start policy of life-long liability for debt. The trade-off between these two policies is that while Fresh Start provides insurance across states, it drives up interest rates and thereby makes life-cycle smoothing more difficult. This paper quantitatively compares these bankruptcy rules using a life-cycle model with incomplete markets calibrated to the U.S. and Germany. A key innovation is that households face idiosyncratic uncertainty about their net asset holdings (expense shocks) and labor income. It is found that expense uncertainty plays a key role in evaluating consumer bankruptcy laws.
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Format: PDF | Size: 533KB | Date: Jan 2003 | Pages: 37
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