Models of Consumer Bankruptcy: Implications for Research and Policy

The author explores three models of individual bankruptcy law which might provide some guidance for analysing policy and for posing further research questions in relation to bankruptcy as a legal and social institution. The models are: (1) Bankruptcy law as a response to deviant behaviour; (2) Bankruptcy as consumer protection; (3) Bankruptcy as social welfare law. Some tentative thoughts are also offered on the comparative analysis of consumer bankruptcy as a focus for understanding relationships between legal and social norms.     

Strategically Surviving Bankruptcy during a Global Financial Crisis: The Importance of Understanding Chapter 15

Chapter 15 of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act allows foreign courts more power in cases that include foreign multinational firms. U.S. businesses unexpectedly have to file a claim in another country with bankruptcy rules that are sometimes drastically different from those in U.S. courts. This paper outlines the different bankruptcy laws in selected countries and exemplifies how some countries place U.S. creditors at a disadvantage relative to employees and stockholders. This knowledge should be incorporated into management's strategic contingency plans in the case of supplier or business customer default. During periods of global financial instability such as the 2008 financial crisis, an understanding of Chapter 15 is essential.     

Bankrupt Households and Economic Crisis. Evidence from the Greek Courts

This paper investigates the profile of the Greek bankrupt households and is the first to deal with the bankrupt households in Greece utilizing court data from the judicial decisions according to the newly established personal Bankruptcy Law 3869/2010. We compare the characteristics of the bankrupt households drawn from the court data with those of a control group of households without financial difficulties constructed from the EU-SILC database. Our findings indicate that income and/or job loss, family breakup, and women with children are important characteristics related to bankruptcy. We also find that although the median of the household disposable income of the bankrupt households is lower than that of the households without financial difficulties, the former do not fall below the poverty line at a greater rate than the latter, in all household size instances. This finding is in line with the results of earlier studies indicating that bankruptcy is not a poor household’s issue. The results are confirmed using logistic regression relating the probability of bankruptcy to a set of socioeconomic measures.     

A model of government–industry–academic collaboration: mandatory bankruptcy counselling policy in Canada

This paper profiles the chronology of a productive and complex collaborative relationship between government, industry and academia (mainly home economists) that has existed since late 1992 around the policy issue of mandatory bankruptcy counselling in Canada. Changes to the Bankruptcy and Insolvency Act (BIA) in 1992 mandated counselling for bankrupts. A 1994 National Counselling Directive Working Group evaluated the impact of this legislation leading to the establishment of a 1995 Qualifications of Counsellors Task Force charged with developing a blueprint for use with the 1996 development and delivery of a course of study for insolvency counselling. Those completing the course will be the first roster of names in a national registry of qualified BIA counsellors in 1997. This paper attempts to capture the dynamics of managing and respecting the interconnections between stakeholders within the constraints of their political and economic realities.     

Accounting for the Rise in Consumer Bankruptcy Rates in the United States: A Preliminary Analysis of Aggregate Data (1945–1981)

While previous surveys of bankrupts and cross-sectional analyses of state data have provided a profile of “typical” bankrupts and the various constraints under which they operate, little in the economic and legal literature on personal financial failure explains the postwar growth in consumer bankruptcies in the United States. This paper constitutes a first attempt to model the theoretically appropriate determinants of aggregate failure rates and to test them empirically for the period 1945 to 1981. The data indicate that the incidence of financial failure has been exacerbated by rising divorce rates, unemployment and credit use, which increased through the mid-1970's. These trends were largely mitigated by increasing consumer wealth held in the form of real estate. However, there is tentative evidence that during its first two years, the Bankruptcy Reform Act of 1978 may have encouraged consumers to petition for bankruptcy.     

Rehabilitation or Liquidation: Consumers' Choices in Bankruptcy

The purpose of this analysis is to identify the legal, environmental, and economic characteristics of debtors that are predictive of their Bankruptcy Code choices. The probability that debtors file under the rehabilitation procedure provided by the Bankruptcy Code (Chapter 13) is influenced by the availability of credit counseling as an alternative to bankruptcy and by the adverse effects of a liquidation bankruptcy (Chapter 7) on future ability to qualify for consumer and mortgage credit. More generous state laws protecting debtors' assets from liquidation in Chapter 7 have a negative effect on the probability that a debtor will contract to repay some debts out of future income in Chapter 13. The results also suggest that the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, which restricted Chapter 13 plans providing zero repayment of unsecured debts, precipitated a decline in the probability that nonbusiness debtors would choose the rehabilitation alternative.     

Crisis leadership in economic recession: A three-barrier approach to offset external constraints

An economic recession is a type of crisis originated from external factors that may imperil an organization’s survival depending on the intensity and duration of the crisis. In peripheral European countries, such as Portugal, the recent financial crisis had devastating effects on various business activities. As a result, Portugal represents an important case study in examining how some corporate leaders have handled the economic recession successfully. I interviewed 20 corporate managers to capture their perceptions of the leadership traits and behaviors exhibited by their CEOs in guiding their companies through the recession. In economic recessions, negative constraints do not affect the most effective leaders, who instead erect barriers against the high-pressure conditions to create a supportive, positive work environment. In order to achieve maximum effectiveness, leaders must act as blocking agents against the negative social impacts of the economic crisis, including the fragility of trust in organizational life (i.e., a barrier against distrust), uncertainty of the future (i.e., a barrier against uncertainty), and toxic emotions (i.e., a barrier against toxic emotions).     

The determinants of households’ repayment difficulties on mortgage loans: evidence from Italian microdata

This article investigates the main determinants of households’ repayment difficulties on mortgage loans in Italy. We contribute to the empirical literature on household financial vulnerability by assessing the joint impact of socio‐demographic factors, loan characteristics and institutional variables on the likelihood of mortgage insolvency and on the intensity of arrears. Using data from the Italian component of the 2008 European Union‐Statistics on Income and Living Conditions (EU‐SILC) survey, we firstly identify which types of households are more vulnerable to unexpected adverse events that may trigger repayment difficulties. Specifically, households whose head is young, unemployed or immigrant show a higher probability of arrears and emerge as those suffering more from the adverse economic conditions connected to the crisis. Moreover, household repayment behaviour is affected by mortgage characteristics and, in particular, having modified contract terms significantly increases current arrears probability. Finally, regional institutional and credit market factors mainly impact on the conditional intensity of arrears. This evidence suggests that, although repayment difficulties mainly arise from a genuine inability to repay, households are less likely to pay on time when institutions are less effective at punishing default, confirming the existence of some strategic behaviour.     

Protecting Minority Homeowners: Race,Foreclosure Counseling and Mortgage Modifications

Millions of minority homeowners are at risk of losing their homes as a result of the housing crisis due to mortgage foreclosure and home repossession. One consumer‐oriented policy response to this crisis is mortgage default counseling for borrowers. This study examines the rate at which minority borrowers seek default counseling and the resulting correlation between counseling and the probability that a borrower obtains a modification of his/her original mortgage contract terms. The results suggest that African Americans are more likely to be counseled, relative to Whites. However, Latinos or other non‐White groups are no more or less likely to be counseled. The probability of loan modifications among counseled African Americans is also higher than other counseled borrowers. These results suggest that counseling policies and the public subsidy of default counseling may be one approach for promoting consumer financial well‐being of these households, but also suggest counseling efforts might be better designed for other minority groups. These results also have implications for the application of counseling to other mortgage decisions, such as refinance .     

Canadian Perspectives on the Challenges of Consumer Bankruptcies

Consumer bankruptcies in Canada have become a major legal, economic and social phenomenon. The number of consumer bankruptcies almost tripled between 1985 and 1995 and exceeded 75,000 in 1996. The author examines the causes of the rapidly escalating number of bankruptcies and shows that there is a strong correlation between the number of consumer bankruptcies and the equally rapid growth in the volume of consumer credit. The paper rejects the argument of credit grantors and federal bankruptcy officials that going bankrupt and obtaining a discharge from one's debts has become too easy and that a high percentage of consumer bankrupts could have made a consumer proposal involving a substantial repayment of their debts.The paper also joins issue with the provisions in Bill C-5, a bill amending the federal Bankruptcy and Insolvency Act currently before the Canadian Parliament, and criticizes the proposed amendments involving consumer bankruptcies on the ground that they ignore or misinterpret the available data, much of them generated by the Canadian Government itself.     

产品伤害危机管理因素对消费者信任修复的影响研究

利用联合分析法,通过情景模拟调研,对产品伤害危机管理中的重要影响因素(如企业社会责任、企业响应策略、媒体效用以及时间)在不同危机严重程度(非常严重、中等程度、轻微程度)下对消费者信任修复造成的影响以及重要程度进行研究,结果表明,时间对于非常严重程度下的消费者信任修复最为重要,响应策略对于中等严重程度下的消费者信任修复最为重要,而企业社会责任对于轻微程度下的消费者信任修复最为重要。     

MODELING THE RECOVERY RATE IN A REDUCED FORM MODEL

This paper provides a model for the recovery rate process in a reduced form model. After default, a firm continues to operate, and the recovery rate is determined by the value of the firm's assets relative to its liabilities. The debt recovers a different magnitude depending upon whether or not the firm enters insolvency and bankruptcy. Although this recovery rate process is similar to that used in a structural model, the reduced form approach is maintained by utilizing information reduction in the sense of Guo, Jarrow, and Zeng. Our model is able to provide analytic expressions for a firm's default intensity, bankruptcy intensity, and zero-coupon bond prices both before and after default.     

Trust,confidence and economic crisis

This article explores the role of trust and confidence in economic life, and their relevance to the current financial crisis. It outlines a recent history of research and debate on the relationship between social trust and economic prosperity, before introducing more recent data on trust against the backdrop of the financial downturn. It goes on to distinguish the informal and social bases of trust from three key formal mechanisms of economic confidence (information, contract, regulation), linking this distinction to Akerlof and Shiller’s revival of Keynes’ discussion of the “animal spirits” that animate economic behaviour. Finally the policy dimensions are considered.     

Between Neo-Liberalism and the Social Market: Approaches to Debt Adjustment and Consumer Insolvency in the EU

Many EU countries introduced debt adjustment systems as a response to the growth of over-indebtedness since the 1980s. These systems, originally introduced in many countries as crisis measures, have now become normalized, metamorphosing through a continuing learning process into a combination of debt adjustment and insolvency relief through a discharge of debt, sometimes after only 1?year, but often after a debt repayment plan over a period of 3–7?years. Since the early 2000s, new Member States of the EU have also introduced insolvency systems, often based on models from the old states. This paper examines experience in European consumer insolvency systems, based on the modest empirical studies of existing systems, primarily England, France and Germany. It discusses the reasons for the use of consumer insolvency, and the limited data on the characteristics of users, charts distinct national approaches and outlines common themes and objectives for consumer insolvency in the context of EU measures to create an integrated credit market in a “competitive social market. To economy”. It concludes by underlining the absence of systematic social science knowledge on existing systems and outlines areas for further research.     

Changing Definitions of Fresh Start in U.S. Bankruptcy Law

Consumer bankruptcy law in the United States has been distinguished by its commitment to the fresh start concept, enabling the debtor to discharge indebtedness and begin a new economic life. In this paper recent developments respecting four important limitations on the scope of the fresh start are examined. The four limitations are: (1) the debtor must give up non-exempt property; (2) in some parts of the country debtors are effectively required to complete 3 to 5 year debt repayment plans (called Chapter 13 plans) before receiving a discharge; (3) certain debts are "excepted" from discharge; and (4) many rights of secured creditors in collateral are preserved despite discharge.The author concludes that, with respect to the first three limitations, debtor's rights have been restricted over the past 15 years approximately. In the conclusion possible reasons for these restrictions in scope of the debtor's fresh start are discussed. The author discusses the tremendous increase in consumer bankruptcy filing rates in the United States but concludes that the best evidence indicates that increased filings are not a good reason to restrict the scope of the fresh start. He suggests that one important factor for increasing limitations on the fresh start has been a reduced political commitment to values that historically have justified the granting of a discharge to consumer debtors.     

Consumer Bankruptcy Stigma: Understanding Relationships with Familiarity and Perceived Control

Bankruptcy stigma is commonly thought to influence debtors' bankruptcy filing decisions. Despite its importance, researchers have not collected direct quantitative measures of bankruptcy stigma, either in terms of attitudes toward bankruptcy or evaluations of filers. Across two empirical studies, we find that (1) attitudes toward bankruptcy and bankruptcy filers are less negative among those with firsthand bankruptcy experience; (2) bankruptcy stigma is a multidimensional construct that includes morality‐, warmth‐, and competence‐related elements; and (3) consistent with psychological models of blame, filers who are perceived to have more control over the circumstances leading to their bankruptcy are more highly stigmatized. By directly investigating bankruptcy stigma, this research can be used to inform models of consumer decisions about bankruptcy filings and bankruptcy policy.     

A Question of Trust: the Pursuit of Consumer Trust in the Financial Sector by Means of EU Legislation

The decrease in consumer trust in the financial sector and the attempts to restore it are receiving a great deal of interest, especially since the financial crisis at the end of 2008. EU legislation is one of the ways that attempts have been made to regain the trust of investors. In the second section, the concept of “trust” will be subjected to an in-depth yet not exhaustive examination, with the aim of reducing its elusiveness. The third section will discuss three recent EU proposals. Examination of these legislative proposals reveals that (1) the term “trust” is not precisely defined, and (2) without stating further reasons, the restoration of trust in the financial sector is considered a worthy goal. In light of the aforementioned, the fourth section will address the desirability of clarity regarding the term “trust.” The fifth section will then assess whether legislation is a suitable means to restore consumer trust, and the sixth section explores whether the restoration of consumer trust in the financial sector is a worthy goal. Indeed, the European legislator and other policymakers seem to consider a low level of consumer trust a bad thing, a high level of consumer trust a good thing, and a higher level of consumer trust an even better thing. This article will argue that it is doubtful whether EU legislation is a suitable means for restoring consumer trust in the financial sector and, moreover, that considering the perverse incentives in the current financial sector, among other things, a realistic degree of trust, implying a certain distrust, appears preferable.     

Social Bond Development Through Continuous Indebtedness

The state of being indebted arises when someone borrows money and later on pays it back. Continuous indebtedness is when a person incurs several loans in a row, such as from banks, credit companies and relatives, without paying off the previous ones. The aim of this paper is to investigate how continuous indebtedness changes the structure of social relations. The Theory of the Gift provides a framework to analyse social bonds among people. A qualitative approach was used to conduct in-depth interviews with 19 indebted households. Findings point to four structures of social relationship trajectories that occur as a result of the continuous indebtedness process. These are Positive Gift Relationship, when the debt reinforces a social bond; Negative Gift Relationship, when a social bond is broken; Selfish Gift Relationship when a person wants to get out of a social bond and Vampire Gift Relationship, when the debt arises due to the debtor’s desire to attract people of a certain reference group. Understanding how the continuous indebtedness process changes social relationships might help in the development of an action plan to avoid extreme financial situations.     

Educating and empowering consumers to avoid bankruptcy

The US has the highest consumer bankruptcy rate in the world and Utah is the state with the highest rate. Bankruptcy filings are rising rapidly due to uninsured medical expenses, job loss, family break‐up and rising consumer and mortgage debt burdens. Lending standards are extremely lax among mainstream creditors while predatory and sub‐prime lending are growing. Utah State University Extension is addressing this problem by creating a new Extension educator position to focus on financial education and by training county Extension educators to mount an extensive consumer education campaign. The ‘Take Charge of Your Money’ programme, developed by the Extension specialist, is being taught throughout the state by satellite distance education. Each educator is being trained to use the Power Pay debt reduction software developed by two Utah Extension educators. As part of the emphasis on empowerment, consumers are being taught to make their own decisions on debt load rather than accepting credit because it is available. Heavy dependence of lenders on credit scores mean consumers are taking on debt that they do not have the cash flow to repay. Grant money available from the state was used to provide training for an Extension bankruptcy prevention team and to provide funding for laptop computers for Power Pay so educators can take the programme to the citizens at county fairs and other public events. While it is too soon to measure the results of the programme, Utah State University's Cooperative Extension project is an example of an aggressive response to the highest bankruptcy rate in the nation. The bankruptcy prevention team is an example of the power of the Extension Service to extend the resources of the university to improve the quality of life for the citizens of the state.     

What explains default risk premium during the financial crisis? Evidence from Japan

As is well documented, subprime mortgage markets carried significant default risk. This paper investigates the relationship between default risk premium, stock market conditions and macroeconomic variables during the financial crisis. Using iTraxx Japan Credit Default Swap (CDS) index spreads covering the period from March 2006 to November 2009, we employ a time-varying dynamic factor model with Markov regime switching to generate regime probabilities for default risk. We analyze the sensitivity of default risk premium changes to stock market conditions and macroeconomic variables by using two-state Markov switching models: a crisis regime sparked by rising loan defaults in the sub-prime mortgage market, and a non-crisis regime. We found strong evidence that the relationship between default risk premium changes, stock market and macroeconomic variables is regime-dependent. Our results suggest that during periods of crisis, CDS indices behave as a higher-risk indicator and become more sensitive to stock market conditions and macroeconomic variables. This paper examines the effects of the financial crisis in explaining the default risk premium. Understanding the determinants of default risk premium is important for financial analysts, economic policy makers and credit risk management.