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Personal Bankruptcy Michelle J CESifo, a Munich-based, globe-spanning economic research and policy advice institution VOLUME 13, N O . 4 WI N TER 2 015 Forum PERSONAL BANKRUPTCY Michelle J. White Stefania Albanesi and Jaromir Nosal Ron Harris and Asher Meir Jeffrey Traczynski Frank M. Fossen and Johannes König Michel Robe and Eva Maria Steiger Research Report ENVIRONMENTAL REGULATION AND Sylwia Bialek and FOREIGN DIRECT INVESTMENT: Alfons J. Weichenrieder THE ROLE OF MODE OF ENTRY Reform Model TOWN TWINNING AND Steven Brakman, GERMAN CITY GROWTH Harry Garretsen and Abdella Oumer Database ASYLUM IN EUROPE WORKPLACE REPRESENTATION IN EUROPE WORLDWIDE WATER SCARCITY FEMALE REPRESENTATION IN POLITICS News NEW AT DICE DATABASE, CONFERENCES, BOOKS THE DATABASE FOR INSTITUTIONAL COMPARISONS IN EUROPE The Database for Institutional Comparisons in Europe – DICE – was created to stimulate the political and academic discussion of institutional and economic policy reforms. DICE is a unique database offering comparative information on national institutions, regulations and economic policy. Although DICE is not a statistical database, it also contains data on the outputs (economic effects) of institutions and regulations where relevant. DICE covers a broad range of institutional themes: Business and Financial Markets, Education and Innovation, Energy and Natural Environment, Infrastructure, Labour Market and Migration, Public Sector, Social Policy, Values and Other Topics. The information is presented in tables (text or data), graphics (interactive application Visual Storytelling), and reports. In most cases, all EU countries are covered as well as some other major OECD countries. Users can choose between current comparisons and time series that show developments over time. DICE combines systematic information from a wide range of sources, presenting a convenient one-stop service for your data needs. DICE is a free-access database. Feedback is always welcome. Please address your suggestions/comments to: [email protected] CESifo DICE Report ISSN 1612-0663 (print version) ISSN 1613-6373 (electronic version) A quarterly journal for institutional comparisons Publisher and distributor: Ifo Institute Poschingerstr. 5, D-81679 Munich, Germany Telephone ++49 89 9224-0, Telefax ++49 89 9224-1462, e-mail [email protected] Annual subscription rate: €50.00 Editors: Marcus Drometer, Silke Friedrich, Christa Hainz, Romuald Méango Editor of this issue: Christa Hainz ([email protected]) Copy editing: Lisa Giani Contini, Sabine Rumscheidt, Daniela Wech Reproduction permitted only if source is stated and copy is sent to the Ifo Institute. DICE Database: www.cesifo-group.org/DICE DICE Report Volume 13, Number 4 Winter 2015 Forum PERSONAL BANKRUPTCY Economics of Personal Bankruptcy and Insolvency Michelle J. White 3 Personal Bankruptcy in the US: Effects of the 2005 Reform Stefania Albanesi and Jaromir Nosal 8 Recourse Structure of Mortgages: A Comparison between the US and Europe Ron Harris and Asher Meir 15 Personal Bankruptcy and Social Insurance Jeffrey Traczynski 23 Personal Bankruptcy Law and Entrepreneurship Frank M. Fossen and Johannes König 28 Insolvency and its Consequences: A Historical Perspective Michel Robe and Eva Maria Steiger 35 Research Report Environmental Regulation and Foreign Direct Investment: The Role of Mode of Entry Sylwia Bialek and Alfons J. Weichenrieder 41 Reform Model Town Twinning and German City Growth Steven Brakman, Harry Garretsen and Abdella Oumer 48 Database Asylum in Europe 55 Workplace Representation in Europe: Works Councils and Their Economic Effects on Firms 59 Worldwide Water Scarcity 65 Female Representation in Politics and the Effect of Quotas 68 News New at DICE Database, Conferences, Books 71 Forum PERSONAL BANKRUPTCY ECONOMICS OF PERSONAL Debt collection and bankruptcy law BANKRUPTCY AND INSOLVENCY Let us first consider creditors’ remedies when debtors have defaulted, but not filed for bankruptcy. Following default, creditors start by mailing, calling and/or visit- ing debtors at their homes or workplaces to demand re- MICHELLE J. WHITE1 payment. They sometimes threaten debtors and engage in harassment.3 Additional creditors’ remedies vary Introduction depending on the type of claim. Unsecured creditors can take debtors’ bank accounts or garnish their wages Personal bankruptcy law is the legal process for resolv- if they are employed, but only after obtaining a court ing the debts of insolvent individuals and married cou- order. Secured creditors such as car lenders can repos- ples – referred to here as “filers.” It is a collective pro- sess their collateral, without going to court in some cas- cedure that simultaneously resolves all of filers’ debts, es.4 Mortgage lenders can force a sale of the mortgaged regardless of their due dates or characteristics. The res- property, but generally need to obtain a court order to do olution may involve filers repaying particular debts in so. Creditors also may report default to the credit rating full or in part, using either their pre-bankruptcy assets agencies, harming debtors’ credit scores.5 or their future earnings or both. Debt that is not repaid in bankruptcy may be discharged, either immediately Unsecured lenders have an incentive to race against or following a period during which filers are obliged to each other to be first to collect, because debtors’ ability repay from future earnings. Bankruptcy law also spec- to repay is often less than the total amount owed and ifies how the total repayment amount is divided among the first creditor to obtain a court order receives more creditors. At the time of filing, bankruptcy law requires than other creditors.6 Secured creditors also have an in- that creditors terminate all collection efforts, so that all centive to act quickly, since collateral assets lose value debt repayment comes through the bankruptcy proce- over time. But races to be first to collect can be ineffi- dure. Bankruptcy laws also specify punishments for cient because they severely harm debtors and their fam- filers. Although all countries’ bankruptcy procedures ilies: examples are when debtors cannot pay for rent or follow this general outline, the specifics vary widely health care because creditors have garnished their wag- and individual countries’ laws may favor creditors or es, when debtors lose their jobs because creditors have debtors. repossessed their cars or when debtors’ businesses shut down because creditors grab essential business assets. Insolvency, in contrast, occurs when debtors are unable To avoid races to be first, bankruptcy law provides for a to make debt payments as they come due and is used stay on legal proceedings that starts immediately when here to refer to default outside of bankruptcy. Creditors debtors file for bankruptcy. This “automatic stay” stops pursue collection efforts against debtors who default creditors’ collection efforts, ends garnishment of wages, and this often causes debtors to file for bankruptcy.2 and terminates the obligation to pay interest on unse- This article begins by discussing the basic features of 3 US Federal law limits the extent to which creditors can engage in debt collection and bankruptcy law for individuals and harassment, but the law has many loopholes. See Dawsey, Hynes and Ausubel (2013) for discussion. small business, highlighting contrasts between the US 4 In the US, defaulting on an automobile loan often leads to a “repo man” who works for the lender driving the automobile away during the and European countries. It then considers the economic night. But if the automobile is in a garage, the lender must obtain a objectives of bankruptcy law. court order to repossess it. 5 See Mann (2006) for an international comparison of debt collection procedures for credit card lenders. 6 In the US, Federal law limits wage garnishment to 25 percent of 1 University of California, San Diego, Cheung Kong Graduate School wages and a few states have higher limits, so that a late creditor may of Business and NBER. not be able to garnish the debtors’ wages if the limit has already been 2 In some countries, the term insolvency is used to refer to the bank- reached. Employers may have the right to fire workers in response to ruptcy procedure. garnishment. See US Department of Labor (2009). 3 CESifo DICE Report 4/2015 (December) Forum cured loans. Instead, all repayment must come through lower than in the US; whereas in Germany, the period of the bankruptcy procedure.7 obligation to repay is three to five years. Some countries have no limits on the period of time that bankruptcy fil- The legal process of bankruptcy starts by creating a list ers are obliged to repay from future earnings, so that of filers’ debts. Not all debts are dischargeable in bank- the obligation to repay ends only with the filer’s death.11 ruptcy – in the US, claims for taxes, child support, ali- Following the obligatory repayment period, filers’ re- mony, debts incurred by fraud, and student loans cannot maining debt is usually discharged, although filers in be discharged. Dischargeable debts include credit card France must convince the bankruptcy judge that they loans, installment loans, medical debts, business debt, have no reasonable prospect of repaying the remaining and debts for utilities and rent. After meeting the ex- debt. The asset and earnings exemptions plus the time penses of bankruptcy, these debts all are repaid at the limit on the obligation to repay from future earnings to- same fraction of their face values. In most personal gether determine how much filers are required to repay. bankruptcies, unsecured creditors receive little or noth- ing. On secured loans such as automobile loans, debtors Insolvency and bankruptcy law also provide for pun- can choose between keeping the collateral by continu- ishments for default and bankruptcy. In the past, default ing to make payments on the loan versus giving up the was considered to be a criminal offense and punish- collateral and having the debt discharged.8 ments were very harsh: they included the death penalty, maiming, selling defaulters into slavery, forcing them Bankruptcy law also determines the amount that filers into exile, and holding them in debtors’ prisons.
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