IMKE LAMMERS

The decision to enter into a formal personal insolvency process involves consideration of the complexities underpinning the available options, the procedures underpinning those alternatives and the immediate and long-term impact of those choices. Matching a person’s individual circumstances with the most suitable personal insolvency option requires that individuals understand, and can adequately deal with, decision-making complexities. Existing research indicates that individuals are not always entering into the most suitable form of personal insolvency and this is likely to lead to sub-optimal outcomes for the debtor, such as prolonged and exacerbated financial hardship and poor mental health. Measuring how various levels of complexity impact the decision-making and behaviours of individuals who are experiencing financial distress requires specifically focussed empirical research. Using the toolbox from behavioural and experimental economics, it is possible to better understand how complexity affects individual decision-making and behaviour, which will assist in the future reform of Australian personal insolvency laws.

With the democratization of credit and a more widespread implementation of personal insolvency systems across the world, personal insolvency research has attracted increasing scholarly and political attention. The growing personal insolvency literature spans various disciplines, such as law, sociology, politics, economics, psychology, and business, but research tends to gravitate towards two subdisciplines that seem difficult to unify: law & sociology and law & economics. More recently, insights from behavioral economics have shown potential to bridge this divide. This study employs a semi-systematic literature review to better understand conceptual and methodological perspectives on personal insolvency law and to encourage cross-disciplinary research. We find that the division across disciplines is ongoing, leaving interesting empirical questions answered and we propose avenues for future research incorporating behavioral methods.

Public records in personal insolvency are frequently discussed as a feature with stigmatising and discriminating potential. Using a framed binary-choice trust-game setup, we experimentally investigate the effects of public records on investment and repayment behaviours, where disclosure lengths are varied. For this purpose, we implemented a sequential version of the game using a matching algorithm to be able to collect data from a more representative sample of 500 Australians. We found that a permanent disclosure of records did not yield any additional benefits for neither investors nor debtors when compared to a finite disclosure length. Considering the negative effects on insolvents’ lives from stigmatisation observed in the literature, we conclude that a finite disclosure length may be more appropriate than a permanent one.

We investigate the effects of different sources of publicly available information on the choice of debt-relief options using a credence goods framework. We further examine the effect of this information on public perceptions towards the available debt-resolution options. To do this, we employed a mixed-method approach, combining an artefactual online experiment and a control-group survey. We found significant differences in choices based on information from consumer advocacy groups compared to information by the regulator and private businesses. However, these differences did not lead to overall better choices. Instead, it appears that decisions were driven by pre-existing attitudes. We found significant stigmatisation of bankruptcy over other debt-resolution options, leading to bankruptcy being chosen less frequently than would be optimal.