People who are financially strapped make astonishingly bad financial decisions. Politicians and mainstream economic theorists assume that most people, including bankruptcy debtors, use a rational financial decision-making process that includes evaluating options and then choosing the option that provides the best long-term results. Under this view, people who buy things or services they cannot afford do so because they are unwilling to exercise self-control or because they are attempting to opportunistically game bankruptcy laws.
This Article argues that people who are in financial distress make bad financial decisions for reasons that have little to do with strategic or rational behavior. Relying on behavioral science that explores how people make decisions when they are facing scarcity, this Article argues that certain tendencies can cause people to make sub-optimal financial decisions. This Article presents a series of bad financial decisions financially distressed people make (or attempt to make) both before and after they file for bankruptcy and argues that financially distressed people often make stupid financial decisions precisely because they are financially distressed.
Bankruptcy policies cannot truly help financially distressed Americans as long as they continue to be based on a pure economic model of consumer behavior. This Article urges decision-makers to incorporate behavioral-science insights to help them understand why financial scarcity impairs the decision-making process and causes cash-starved Americans to make decisions that might appear to be bewildering to lawyers, judges, or politicians. This Article ends by suggesting things that bankruptcy laws, lawyers, and judges can do to help financially distressed Americans make better financial decisions before, during, and (hopefully) after their bankruptcy cases.