Faculty Publications - College of Business

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A socially efficient bankruptcy law is one that would have the effect or minimizing the present value of social costs stemming from bankruptcy while permitting debtors to make a "fresh start." Analysis of a sample or petitions for personal nonbusiness bankruptcy filed under the Bankruptcy Reform Act or 1978 shows that about 30 percent or petitions for Chapter 7 and about 25 percent of petitions for Chapter 13 were cases where social costs were not minimized as would be required under socially efficient bankruptcy legislation. The social costs of Chapter 7 may be reduced under proposed reform (S.445 and H.R. 1800) as the judge would be provided with information concerning estimates of debts repayable under both chapters and would disallow those Chapter 7 cases which represented a substantial abuse of bankruptcy law. The study data suggest that guidelines for acceptance or Chapter 13 cases should also be scrutinized. In particular, petitioners should be discouraged from providing "token" debt repayment plans while maintaining ownership or large accumulations of assets.


Originally published in Journal of Consumer Affairs, 18(2) p231-250, Winter 1984.


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