It's Time for Means-Testing

Abstract

Despite an extended period of high economic growth and low unemployment, consumer bankruptcy rates have hit an all-time high. In response to this personal bankruptcy boom, Congress proposed "means-testing" debtors, requiring upper middle-class debtors to opt for Chapter 13, rather than Chapter 7. Means testing rests on the sound moral intuition that those who can pay a substantial portion of their debts with minimal hardship should be required to do so. The urgency for means-testing is amplified by the underlying dynamics driving the bankruptcy boom. Recent research shows that the rapid increase in bankruptcy filing rates is being driven by two factors, reductions in the economic costs of filing bankruptcy and a decline in the social stigma and personal shame associated with bankruptcy filings. Because the reduction in shame and stigma operates most heavily at the margin for high-income debtors, it can be predicted that the number of high-income debtors who file bankruptcy can be expected to continue to increase in coming years, thereby making means testing increasingly urgent. Finally, other factors such as increased debt, increased credit card debt, and certain sociological factors are shown to be lacking empirical foundation.