Quantifying the Benefits of the Fresh Start

I recently discovered a not-so-new paper that provides a useful answer to a question I've asked before:  Who benefits from consumer bankruptcy, and to what degree? This is a real challenge for policy-making, and well-supported answers are essential to greasing the wheels of reform.

In this paper, Will Dobbie (Princeton) and Jae Song (SSA) use a creative technique, comparing the financial outcomes of Chapter 13 debtors whose plans were--and were not--confirmed to probe the positive effects of access to such relief (apparently whether or not the payment plan is successfully completed). Successful access to Chapter 13 protection led to over $5000 in increased annual earnings in the first ten post-filing years and a 3.5 percentage-point increase in employment over the first five post-filing years, including a nearly 3 percentage-point increase in self employment. Access to relief also reduced the receipt of "welfare" benefits and increased retirement savings contributions.  Most striking, access to debt relief reduced mortality (presumably by decreasing stress) during this period by almost 2 percentage points--which is a 47.5% decrease from the mean for filers whose cases were dismissed, largely attributable to a large, positive effect on filers over 60. The authors attribute these gains to an increased incentive to work and produce earnings and  reduction in economic instability and stress.

The results of this study are among the many individual and societal benefits of consumer bankruptcy commonly identified in legal literature. Indeed, the authors conclude that "individual debt relief is much more likely to be welfare-improving than previously realized"--and these instances of individual welfare redound in direct ways to the state and society as a whole. While I can see a variety of quibbles that empirical scholars might have with this study, the results provide fairly solid support for the most common working theories of relief, and they offer even greater comfort for policymakers searching for reasons to introduce or expand individual debt relief.