Scholars have noted that a declaration of insolvency is effectively to claim an insurance payout in the form of debt relief. To my knowledge, however, none have considered whether debt relief should be explicitly organised as an insurance scheme. This report outlines such a scheme and argues its benefits in terms of administrative efficiency, the dignity and privacy of insolvent persons, sensible risk management, discouraging unsustainable borrowing, and macroeconomic stability.
Call it Compulsory Debt Relief (CDR) insurance, analogous to Compulsory Third Party (CTP) insurance for motor vehicles. The ‘compulsory’ aspect is not new. Debt relief is already mandatory; borrowers already pay insurance premiums that finance debt relief, but with little transparency for most.
The argument is organised as questions and answers. Starting with basic Q&A on debt relief: what is debt relief, why is it mandatory, who pays? (Mostly, debtors pay for debt relief, not creditors.) Then to the benefits of CDR for households and businesses, both solvent and insolvent, and the various contributions of CDR to financial and macroeconomic stability. And speculation that banks can be reorganised as providers of CDR insurance.