Working Paper

Dealing with consumer default: bankruptcy vs. garnishment

Abstract: What are the positive and normative implications of eliminating bankruptcy protection for indebted individuals? Without bankruptcy protection, creditors can collect on defaulted debt to the extent permitted by wage garnishment laws. The elimination lowers the default premium on unsecured debt and permits low-net-worth individuals suffering bad earnings shocks to smooth consumption by borrowing. There is a large increase in consumer debt financed essentially by super-wealthy individuals, a modest drop in capital per worker, and a higher frequency of consumer default. Average welfare rises by 1 percent of consumption in perpetuity, with about 90 percent of households favoring the change.

Keywords: Default (Finance); Bankruptcy; Consumer credit;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2011

Number: 11-35