Of course, a reduced potential benefit would not cause potential “fairness” concerns if the demands made of the debtor were limited.  But they are not.  The Belgian law appears somewhat ambivalent about moderating the demands on debtors.  On the one hand, the law directs the mediator to develop a plan that will allow for maximal payment of debt while preserving for the debtor’s family “a life in conformity with human dignity.”   On the other hand, if the matter has to go before the court, the law in two separate places reminds the judge that she can demand that the debtor make payments even from exempt income —a source that the German law and even the French law now hold inviolate.  Of course, such extreme demands must be “specially motivated,” and the law also reminds the judge that the debtor should in any event be left with at least the legally guaranteed “existence minimum.”  But the law presently guarantees only about €7450 per year to singles living alone and about €9950 per year to most other debtors (including all married couples, regardless of the number of children in their household).   Thus, the Belgian law sets up the same situation of potential trouble as the pre-1999 French law.   Demanding that debtors live at the poverty line to receive at most a partial discharge benefit seems like an “unfair” offer that any player of the Ultimatum Game might well reject.

B.  Hyperbolic Discounting and the Impact of Plan Duration

Hyperbolic discounting suggests that longer plans are not necessarily more effective than shorter ones at deterring excessive borrowing.  Behavioral research suggests a “priority of the present,” in that debtors will most likely view a 5-year plan as only about twice as onerous as a 1-year plan,  as the later months of a term are hyperbolically discounted.  But not only are longer plans not necessarily more effective, behavioral economics suggests that they may be even less effective if “fairness” and consumer acceptance are important goals.

Hyperbolic discounting exacerbates the “unfairness” effect of overly demanding payment plans.  While debtors weigh the very real and immediate costs of a period of deprivation and subsistence living, they are likely to discount the benefit of a discharge more and more as its benefits are placed farther and farther away in the future.  The future benefits of debt relief are likely to be overwhelmed by the perceived burdens of spending even a moderately long time living at a subsistence level.  When this happens, consumers are more likely to sense that the system is “unfair.”  The Ultimatum Game predicts that consumers may then act in a way that harms both themselves and their creditors—for example, by rejecting the benefits of the system by hiding in the underground economy, or by manipulating the system through false statements about assets or income.  Once again, of central importance to European policymakers, consumer perceptions of “unfairness” undermine the potential for positive interaction with the system and inculcation of financial and social responsibility.

1.  Germany

The German system has incorporated elements from the beginning that (probably inadvertently) reduce the effects of hyperbolic discounting.  Recent revisions have furthered that effort.  The German system originally delayed relief until after debtors had turned over most nonexempt income for seven years.  Indeed, given the duration of the several preceding stages of the German proceedings, debtors had to wait for relief for up to eleven years in some instances.