In his new book Bankruptcy: the Case for Relief in an Economy of Debt Assistant Professor with the LSE Department of Law, Dr Joseph Spooner presents a social insurance theory of bankruptcy - a theory that focuses on how bankruptcy law could be used to offer relief to debt-laden individuals and in doing so release the burden of debt on our economy, while also acting as a safety net of last resort for struggling households.
Combining a detailed analysis of key elements of bankruptcy law with extensive theoretical and policy discussions from across economics, sociology, law, and political science, Dr Spooner highlights the unsustainability of the current burden of excessive debt. He depicts a contemporary economic order which expects households to borrow to fuel growth, augment stagnant wages, and close gaps in a social safety net torn by austerity.
Policymakers, officials, and judges in the English context too often treat bankruptcy (or personal insolvency) like they would corporate insolvency. These perspectives focus unduly on maximising returns to creditors, rather than on the potential bankruptcy has as a mechanism of social insurance against the risks of a debt-dependent economy.
“I argue that bankruptcy law can best serve the public interest not by maximising returns to the financial sector, in the expectation that this will support the flow of credit, but in offering debt relief to struggling households, so reducing aggregate debt levels and encouraging responsible lending,” Dr Spooner said.
“Following the financial crisis and years of recession and stagnation, policymakers can no longer cling to discredited ideas of the efficiency of household credit markets and the ‘democratisation of credit’. A new consensus is emerging regarding the dangers of excessive debt. What is less widely seen is the potential for bankruptcy to produce positive public policy outcomes through debt relief, due to its unique status as an institution that discharges debt routinely and as of right.
“My book opens up conversations between bankruptcy literature and wider policy discussions regarding the place of household debt in the contemporary economy,” Dr Spooner said.
The book addresses key questions such as why publicly provided legal debt solutions should be favoured over ‘market-based debt resolution’; the scope and extent of debt relief that should be offered to over-indebted individuals; and how the law can guard against moral hazard and the risk of abuse of debt relief.
It is essential reading for anyone interested in understanding the problem of consumer debt and how best to address it.