Title: The Paradoxical Bankruptcy Discharge: Rereading the Common Law- Civil Law Relationship
Abstract: IntroductionThis Article shows the limits of the highly ideological U.S. debate on consumer bankruptcy and challenges the wisdom of both the progressive and law-and-economics bodies of scholarship. In particular, the study employs a descriptive analysis of consumer bankruptcy discharge informed by behavioral law-and-economics methodology in order to show how bankruptcy shapes debtors' behaviors. This Article argues that bankruptcy discharge, traditionally regarded in common law legal systems as a pro-debtors remedy, in its most liberal extension, instead becomes a powerful incentive toward over-indebtedness and therefore, a profitable legal device for financial institutions.Further, this Article argues that civil law legal systems, which are typically considered pro-creditor due to their much stricter approach toward consumer debt, present an opposite picture: a much less-indebted middle class and a less fertile soil for creditors. By demonstrating the paradoxical effects of the common law and civil law approaches to consumer debt, this Article challenges the traditional wisdom according to which the civil law tradition-based on the universal patrimonial rule for debtors-is purely a pro-creditor system while the common law tradition-faithful to a liberal notion of bankruptcy discharge-is a pro-debtor one.This assertion lays the foundation for a new normative analysis of bankruptcy discharge that suggests that in order to truly protect debtors, contrary to traditional progressive ideas, it is necessary to adopt a less paternalistic approach that considers the incentives that bankruptcy discharge poses to debtors. This ex ante perspective, different from the one supported by law-and-economics scholarship, arrives at the conclusion that in order to ultimately make debtors safer, it is necessary to tighten access to bankruptcy discharge and restore the mechanism's original founding principle of protecting only the honest but unfortunate debtor, not any over-indebted individual.This analysis is organized as follows. Part I illustrates the recent global trends in consumer bankruptcy, particularly, the tendency of civil law legal systems to move toward the common law model through the liberalization of discharge of consumer debt. Part II describes the historical evolution of bankruptcy discharge in both England and the United States, and points out the fact that the civil law tradition has taken a different course of development for debtors' liability compared to the direction followed by common law legal systems. Part III shows how the rationale behind discharge has dramatically changed in twentieth-century American bankruptcy law. Part IV illustrates the U.S. debate on the scope of discharge and offers an alternative descriptive analysis based on the results of a behavioral law-and-economics analysis. Lastly, Part V proposes a new normative analysis of discharge that departs from both the progressive and conservative scholarly discourse in the United States.I. Recent Trends in Consumer BankruptcyA. The Democratization of Consumer Credit and the Bankruptcy DischargeIn the last three decades, several countries belonging to different legal traditions have encouraged the liberalization of consumer bankruptcy by introducing the discharge of consumer debt.2 This trend3 finds its immediate explanation in the explosion of consumer credit and runs opposite to the pattern in the United States traditionally the most liberal country in its attitude toward discharge. This democratization-or using more honest terms, deregulation-of credit has typically been singled out as the reason behind the recent global trends in consumer bankruptcy discharge.4Particularly in the 1990s and early 2000s, the United States and U.K. under the Clinton and Blair administrations, respectively, eased access to consumer credit through deregulation.5 In order to maximize welfare, these two countries strongly embraced the ideas that high consumption drives economic growth and that consequently, risk-taking and consumer debt must be spurred even among low-income borrowers-ideas exemplified by the expansion of subprime lending. …
Publication Year: 2014
Publication Date: 2014-04-01
Language: en
Type: article
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