Paying one’s debts may well be “the norm,” but maintaining a modest but “dignified” lifestyle is certainly also the norm.  This is probably particularly true in the states of Continental Europe, which take a much more active role in guaranteeing a minimal level of social support for their citizens.   The Ultimatum Game suggests that people have a deeply ingrained sense of the importance of fairness in balancing benefits and burdens.  Even if a system offers discharge of debt or other effective relief, if it demands that debtors divert so much of their income to creditors that they are left worrying about how basic needs will be met (housing, food, health care), consumers are likely to view such a system as imbalanced, abnormal, and unfair.  Debtors might sacrifice their own benefit by opting to transfer or destroy assets or go underground rather than engaging an “unfair” bankruptcy system that demands too much sacrifice for an eventual benefit of some form of relief from debt.  Ultimately, if consumers (both debtors and non-debtors) view the system as unfair and thus not worthy of respect, this jeopardizes whatever potential the system might have for inculcating positive lessons about responsible use of credit.   

Among Continental European consumer bankruptcy systems, recent years have witnessed a general progression away from pressing debtors to satisfy creditor demands and toward requiring more moderate sacrifices by debtors and offering them greater relief in return.  The “bounded self-interest” revelation of behavioral economics suggests that this evolution toward balancing sacrifices and rewards will improve these systems’ potential to achieve their goals of social education.  To be sure, these developments doubtlessly occurred for other reasons—to ensure that debtors could successfully complete the plans and receive needed relief.  But once again, behavioral economics offers one more reason to applaud some developments and to challenge others.

1.  Germany

The German system is a prime example of one that has evolved in ways that behavioral economics predicts will enhance consumers’ view of the system as “fair” and successful.  When the German legislature adopted its new Insolvenzordnung in 1994 (in force only since 1999), it offered complete discharge of unpaid debts, but it imposed weighty demands on consumer debtors.  Debtors had to cede to creditors 100% of their nonexempt income for four years, and between 80% and 90% for three additional years.   Income exemption levels at this time were relatively modest, leaving an absolute maximum of, for example, only about $16,500 per year to a childless couple.   Sensitive to the criticisms of debt counselors and other debtor advocates, the German parliament responded sensitively to enhance the system beginning in 2002.  It increased the income exemption levels for the vast majority of German households by 50%, and it instituted bi-annual indexing to ensure that these levels would keep pace with rising costs of living.   Consciously or unconsciously, the German parliament has crafted an approach to consumer overindebtedness that carefully balances relief with reasonable and “fair” demands for debtor responsibility.  This should maximize the potential for positive attitudes from debtors and consumers generally—and consequently the educational potential of the system as a whole.