Friday, March 11, 2005

Perverse incentives.

Via &c., the Wall Street Journal suggests (subscription only) that the bankruptcy bill may actually increase the number of bankruptcies by lessening the disincentives to lend to people who are bad risks.
Some bankruptcy economists theorize that there's an inverse relationship between strong consumer-protection laws and bankruptcy filings. In states where it's harder for lenders to get judgments against consumers, bankruptcies might be lower because lenders are pickier about who gets credit. In states that make it easy for creditors to repossess property, bankruptcies might be higher because more consumers are extended credit.

That, the economists say, might explain why many Southern states--known for the creditor-friendly laws--have higher bankruptcy rates. Alabama, Georgia and Tennessee provide a wide range of prejudgments, creditor remedies, attachments, garnishments and wage assignments with limited or no litigation, Mr. Gerdano says.
Gerdano is the executive director of the American Bankruptcy Institute, a Washington group composed of bankruptcy judges, and accountants and lawyers who represent both borrowers and lenders.

Cross-posted (with ensuing discussion) here:
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