Getting Out of Debt: Garnishment of Wage in Whose Interest?
01 Nov 1999-European Journal of Law and Economics (Kluwer Academic Publishers)-Vol. 8, Iss: 3, pp 207-230
TL;DR: In this article, a dynamic model of debtor behaviour is proposed to reduce the rate of garnishment, which at present amounts to 100 percent of the wage income exceeding a defined subsistence level, thus probably destroying incentives to work.
Abstract: Garnishment of wage as a way for creditors to enforce payment by unwilling or insolvent debtors, while very common in Germany and Switzerland, is not very successful Based on a dynamic model of debtor behaviour, this paper explores two alternatives of reform One is to reduce the rate of garnishment, which at present amounts to 100 percent of the wage income exceeding a defined subsistence level, thus probably destroying incentives to work According to model simulations, reducing the rate of garnishment is likely to result in an increase of labour supply but a decrease of garnishment revenue per period Second, the introduction of a debt release as it exists in the United States would have an ambiguous effect on labour supply While providing debtors with a fresh start, it would result a partial loss for creditors A Pareto improvement thus does not seem to be possible When taxpayers as an involved third party are taken into account, however, a potential Pareto improvement appears attainable through debt release
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TL;DR: In this article, the authors suggest to adequately reduce the outstanding claim and to make debt release contingent on payment, and when the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately.
Abstract: Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors' best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer's ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.
5 citations
Cites background from "Getting Out of Debt: Garnishment of..."
...To our best knowledge, only Zaborowski and Zweifel (1999) explicitly address ex-post effects, analyzing the effects of wage garnishment....
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TL;DR: In this article, the authors suggest to adequately reduce the outstanding claim and to make debt release contingent on payment, and when the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately.
Abstract: Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors’ best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer’s ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.
3 citations
TL;DR: The authors analyzed the consumer's incentives prior to distress and during a "period of good conduct" following bankruptcy, and proposed alternative regulations that provide superior incentives, minimizing the overall distortions at both dates.
Abstract: Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer's incentives prior to distress and during a "period of good conduct" following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor's choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.
2 citations
Cites background from "Getting Out of Debt: Garnishment of..."
...Zaborowski & Zweifel (1999) show that a 100% garnishment of wages may lead to a decline in labor supply, and argue in favor of partial garnishment....
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05 May 2010
Posted Content•
TL;DR: In this paper, the authors analyze the consumer's incentives prior to distress and during a period of good conduct following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives.
Abstract: Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer’s incentives prior to distress and during a ’period of good conduct’ following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor’s choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.
References
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Book•
01 Jan 1992
TL;DR: In this paper, the fundamental problem of Calculus of Variations is considered and optimal control with constraints is studied. But the focus is on optimal control, not optimal control theory.
Abstract: PART ONE: INTRODUCTION: 1. The Nature of Dynamic Optimization. PART TWO: CALCULUS OF VARIATIONS: 2. The Fundamental Problem of Calculus of Variations. 3. Transversality Conditions for Variable-Endpoint Problems. 4. Second-Order Conditions. 5. Infinite Planning Horizon. 6. Constrained Problems. PART THREE: OPTIMAL CONTROL THEORY: 7. Optimal Control. 8. More on Optimal Control. 9. Infinite-Horizon Problems. 10. Optimal Control with Constraints.
634 citations
"Getting Out of Debt: Garnishment of..." refers background in this paper
...Chiang 1992, part 3 . . The equation of motion 2 has to be rewritten:...
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TL;DR: The authors examined how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit and found that they increase the amount of credit held by high-asset households and reduce the availability and amount available credit to low-assets households.
Abstract: This paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit. While generous state-level bankruptcy exemptions are probably viewed by most policy-makers as benefiting less-well-off borrowers, our results using data from the 1983 Survey of Consumer Finances suggest that they increase the amount of credit held by high-asset households and reduce the availability and amount of credit to low-asset households, conditioning on observable characteristics. Thus, bankruptcy exemptions redistribute credit toward borrowers with high assets. Interest rates on automobile loans for low-asset households also appear to be higher in high exemption states.
459 citations
Book•
01 Jan 1994
TL;DR: The Structuralist Theory of Unemployment Fluctuation as discussed by the authors is based on the turnover-training model and a two-sector fixed-investment model for the single-economy theory.
Abstract: Preface Introduction Concepts and Agenda Modern Equilibrium Theory Contrary Postulates of the Neoclassical Schools The Labor-Market Equilibrium Locus in Modern Models The Product-Market Equilibrium Locus and Partial-Equilibrium Unemployment Determination Capital-Market Equilibrium, Neoclassical and Modern, and General-Equilibrium Employment Key Factors in the Structuralist Theory of Unemployment Fluctuation The Closed Economy: Working Models A Turnover-Training Model A Customer-Market Model A Two-Sector Fixed-Investment Model Synthesis of the Single-Economy Theory Small and Large Open Economies: Working Models International Linkages through Investment in Employees International Linkages through Investment in Customers International Linkages through Investment in Fixed Capital Synthesis of the Global-Economy Theory Microtheoretic Formulations, Modern and Neoclassical Interest and Wealth in the Microeconomics of the Incentive Wage and Equilibrium Unemployment Structural Shifts and Economic Activity in Neoclassical Theory Empirical Evidence Econometric Tests of the Theory: A Postwar Cross-Country Time-Series Study A Concise Nonmonetary History of Postwar Economic Activity Concluding Notes Notes on Classicism, Etc. Economic Policies to Which the Structuralist Theory Might Lead Notes Glossary of Frequently Used Symbols Index
426 citations
TL;DR: In this article, a survey of factors correlated with consumer debt investigated several psychological variables which have been suggested as causes or effects of debt, and the results suggest that a complex of psychological and behavioural variables affect debt and are affected by it.
407 citations
"Getting Out of Debt: Garnishment of..." refers background in this paper
...Lea et al. 1995, 1993 and Tokanuga 1993 who studied the psychological background of individuals in high debt....
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TL;DR: The authors explored whether theory and research in consumer behavior, psychology, and substance abuse can distinguish between consumers who can or cannot use consumer credit effectively, with particular interest paid to the additional predictive ability of psychological variables beyond that provided by background characteristics and adverse life events.
256 citations