From one perspective, it makes no sense to view consumer bankruptcy policy as a separate topic at all. If the bankruptcy system is part of the social safety net, then we should think about bankruptcy policy alongside health care policy, insurance policy, entrepreneurial policy, and the like. Still, bankruptcy policy is in fact largely made against the backdrop of its relation to the consumer finance markets. Thus, this chapter considers bankruptcy policy in relative isolation, as it relates to the finance markets.

As the following discussion suggests, my view is that much work remains to be done in analyzing policy issues even in that relatively confined milieu. If we could produce a sound understanding of bankruptcy policy as it relates to the finance markets, then that understanding should form a basis for considering the extent to which other major policy imperatives (like health care and social security) should influence (or be influenced by) the reality of bankruptcy and financial distress.

When we think of bankruptcy rules as a policy lever for minimizing the social costs of excessive borrowing, we confront a substantial economics literature about what type of discharge would have the optimal effect on credit markets. The general problem is that bankruptcy law must balance the protection of creditors, which promotes the availability and inexpensive provision of credit, against the protection of debtors, which prevents overindebtedness and underscreening by banks. Thus, strong legal protection of creditors may be efficient ex ante, but create inefficiencies ex post.