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Monday, November 29, 2010

Rebuilding Lives After Bankruptcy

    The option of bankruptcy can be seen as a potential pareto improvement for society. While it is not the best outcome, it has the potential to make a pareto improvement. The gainers will more than compensate the losers. The option to opt out of debt for a consumer will cost less to society than the loss to the company. While the wealth of some companies can amount to billions, individuals do not have as high of a potential to accumulate as much wealth as some companies can. Many consumers are filing for bankruptcy due to mortgages and credit cards. The loss to these types of companies will be minimal as opposed to the loss for the individual. Therefore, the consumer surplus of this option will be much higher than the actual expenditures involved in the loss to a huge company. There is a set back however. By raising the supply of bankruptcies to consumers, the quantity for bankruptcies will go up, and profits will go down. There needs to be some type of ceiling for the amount of bankruptcies allowed. The government imposes this ceiling by making it harder to file for bankruptcies. For example, a person needs to meet a certain quota in order to be eligible to opt out of debt. If the price of filing for a bankruptcy was too high, however, consumer surplus would be very minimal and it would be inefficient to make the price that high.
       As stated in class, wealth is a choice. If a person cannot accumulate any wealth due to creditors swarming them with demands and lack of access to resources, this could be a tough yet successful choice. It takes a long time to recover wealth after filing for bankruptcy. On the bright side, this article explains how these people have rebuilt their lives because of this choice. Without it, wealth might not come at all.

Government creates bankruptcy statutes. Since a foundational aspect of this course is the idea of market failure, I wonder if the voluntary actions of the people involved in bankruptcy today would have resulted in market failure without the statutes?
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