The question today, then, is whether a consumer debt relief system can help in preventing excessive consumer borrowing, and if so, which types of approaches are best suited to changing incentives and inculcating responsible borrowing habits.  I join recent commentators  in arguing in Part I that behavioral economics can explain some of the reasons why consumers get themselves into trouble despite the obvious dangers of borrowing and overspending.  I therefore propose in Part II that we should look to behavioral economics in assessing whether the consumer bankruptcy system might affect incentives and attitudes to reduce overindebtedness problems before they arise.  This Part concludes that legal regulation appears virtually powerless to affect the demand side of the consumer credit equation.  To the limited extent that consumer bankruptcy might reduce overly risky borrowing, I argue in Part III that behavioral economics indicates that some models of consumer debt relief are likely to be more effective than others in achieving this goal.  Part IV applies several behavioral insights to a number of emerging consumer debt relief systems in Continental Europe.  It suggests that aspects of certain of these systems are better suited than others to educating debtors on personal responsibility and inculcating payment morality—the stated goals of these new systems.

To be completely clear at the outset, I do not intend in this paper to advance “strong” conclusions about consumer bankruptcy based on behavioral economics.  For one thing, it is not entirely clear that the results of behavioral studies  conducted on U.S. subjects would produce similar results if conducted on Western Europeans—much less members of other cultures.  I strongly believe, however—and the behavioral literature suggests—that the behavioral patterns discussed in this paper are, if not universal, at least shared to a significant degree.  Thus, I offer for further consideration what I consider to be compelling insights from behavioral economics on the potential role of consumer bankruptcy in preventing and treating the problems associated with consumer overindebtedness—virtually wherever in the world they might arise.

I.  The Behavioral Economics of “Excessive” Consumer Borrowing

The United States and Europe set out slowly on the path to consumer overindebtedness in the early 1900s with the rise of installment selling.  Lendol Calder’s description of the U.S. credit system at the turn of the twentieth century applies in like manner to Europe:  “people who had money could easily borrow more, while people without money found it difficult to borrow at all.”   In the first quarter of the 1900s, though, an overhaul of usury laws and the rise of installment selling of consumer goods made “consumer credit” an acceptable concept economically and eventually socially in the United States.   In Europe, consumer credit restrictions slowed the tide of consumer lending that rose in the U.S. after World War II. 

The pace of consumer credit expansion accelerated explosively in the late 1970s and early 1980s with the “democratization” of credit in both Europe and the U.S.  The U.S. Supreme Court all but abolished effective regulation of consumer lending with its 1978 decision in Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp.   European states followed suit as parliaments “liberalized” consumer credit regulations in the 1980s.   Consumers were now left largely to their own devices in choosing whether and to what extent to take on debt.  Opening up the consumer credit market introduced a frenzy of competition among the purveyors of this highly profitable “product.”   Intense competitive pressures forced lenders to advertise and structure their products to take advantage (consciously or unconsciously) of powerful competitive forces—the psychological biases and weaknesses of their customers.