Consumer Bankruptcy, Economics Of

In many countries, individuals whose debts have become excessive have the right to file for consumer bankruptcy. Under certain circumstances, a court will partly discharge the person's debt. Consumer bankruptcy procedures have existed in the United Kingdom since 1705, in the United States as a permanent program since 1898, and in many Western European countries since about 1990. Consumer bankruptcy is an important economic issue, because several million households face financial distress. This entry addresses three aspects: (1) a survey of consumer bankruptcy law in the United States (softer on debtors) and in Germany (more favorable toward creditors); (2) a summary of the underlying economic reasoning; and (3) the empirical evidence.