Is the New Bankruptcy Legistlation an Incentive?

by Marianne Richmond on June 24, 2005

Todd Zywicki writing in the Volokh Conspiracy today poses the question:Do Consumers Respond to Bankruptcy Law Incentives? and then proceeds to answer it…..

Now defines incentives as "something, such as the expectation of a reward or the fear of punishment that indiuces or motivates behavior." 

Zywicki, I believe, is applying incentive in the context of expectation of reward. He supports the bankruptcy legislation presumably believing that the majority of those filing for bankruptcy willfully and joyfully acquired their debt spurred on by the incentive of the bankruptcy code. The reward is the total elimination of the debt with few requirements and few repercussions

There has been over a 60% increase in bankruptcy filings since the new legislation was enacted which, in a nutshell, doesn’t allow for the discharge of debt, has lots of requirements and has many repercussions. Zywicki attributes this phenomena to a consumer response to bankruptcy law incentives.  The old bankruptcy laws provided an incentive to file for bankruptcy.




Those opposing the bankruptcy legislation believe that the majority
of people file because of financial hardship brought on by debt
accumulated because of job loss, illness, medical or legal bills or
other less avaricious or controllable reasons. He calls this the
distress model. And, importantly that the new code will leave them not
only unprotected, but punish them for being in a situation that they
couldn’t control or avoid.  Yes, there are some people, maybe lots of
people, who used the old code as an incentive to behave badly…but
need we tar everyone with their brush?

So, I believe that the rush to file before the new code takes effect can
be explained by a response to incentives. The fear of punishment
application of the word incentive. Zywicki says there is volumes of
economic theory that predicts that consumers would rush to file
bankruptcy before the new legislation  takes effect. I am sure there
is…I just believe that both models are incentive models, one reward
and one punishment. For many, bankruptcy is a last resort and is undertaken when all else fails. The new legislation’s just moved up the time-line for last resort.

And one more thing… people seem to put the filers into two
groups as explained by the distress model and the incentive model.
Well, there are subgroups of the distress model. One of them is of
course the illness/medical distress. The other is the financial
hardship through debt acquired not by the incentive of an easy out but
by debt acquired by the constant offer of more credit that is pervasive
in our society and is irresponsibility plied to those who are all ready
beyond the "legal limit". Just like the laws against serving drinks to
the intoxicated…there should be laws against the constant offers of
"10% off todays purchase if you accept our Whateverthestore Credit
Card", and "here are your cash advance checks that will eat up the rest
of your credit limit…oh you ate it all ready, well here is an
increase" to the all ready credit drunk.




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