Bankruptcy as a “Safety Valve” for the U.S. Economy

I recently read an academic working paper from three professors that provided quite a bit of support for things I (and my bankruptcy-practicing colleagues) have long suspected. It’s one of those papers that are probably initially of interest only to bankruptcy law practitioners and economists, which is a shame, since it contains some very intriguing research on aspects of bankruptcy that lots of folks would find interesting.

The title of the paper is daunting: “Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates.” (PDF file)

It was authored by Tal Gross (Columbia University), Matthew Notowidigdo (University of Chicago Booth School of Business), and Jialan Wang (Washington University Olin School of Business).

Bankruptcy Filings and Tax Refunds

The premise, despite the daunting title, is relatively simple: bankruptcy filings increase after consumers receive tax refunds, thus supporting the premise that it’s the legal fees associated with bankruptcy that keep many consumers from filing for much-needed protection.

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