Informal Bankruptcy

Abstract

In the economic literature on bankruptcy, the standard methodology is to model the individual's bankruptcy decision as a binary choice between "bankruptcy" and "no bankruptcy." We define an additional choice-non-repayment without seeking the formal protection of the bankruptcy system-as informal bankruptcy. Using data from a large credit card issuer, we find evidence that while both lenient exemption laws and garnishment laws increase bankruptcies in the standard model, loose garnishment discourages default in our expanded model, while at the same time more pronouncedly shifting individuals from informal to formal bankruptcy. This result suggests that previous research may substantially understate the degree to which garnishment laws drive defaulting individuals to choose bankruptcy. Moreover, lenient exemption laws increase both formal and informal bankruptcy. We also find that borrowers living in majority black neighborhoods are more likely to choose informal bankruptcy, and less likely to choose bankruptcy, than other borrowers. We also test whether creditors' strategic interactions increase bankruptcies. We develop a two-period model of the "creditor's dilemma," a popular hypothesis in the legal literature. We examine a testable implication of this model, namely, that increasing the number of creditors (while holding the amount and availability of credit constant) should increase the probability that a defaulting borrower enters bankruptcy rather than a workout, and either decrease or not affect the probability of informal bankruptcy. We find that the number of creditors indeed has a positive and statistically significant effect on the probability of bankruptcy, and, depending on the specification, a significant negative or insignificant effect on informal bankruptcy.

Why Use Debit Instead of Credit? Consumer Choice in a Trillion-Dollar Market

“…This is not surprising in light of other data showing that cash back transactions are relatively infrequent, and that relatively few debit users initiate them (only 18% in the April/May 1999 PSI Global Survey, 29% in the SOC). As such I conduct simulations allowing for weak and strong exclusive cash back motives, where C = 7% and C = 40%, 35 About half of bad credit card debts are written off without the debtor filing for bankruptcy (Dawsey and Ausubel 2002).…”

Modeling the Revolving Revolution: The Debt Collection Channel

“…While some consumers do file for personal bankruptcy protection, most delinquent consumers do not (see Dawsey and Ausubel 2004 and Section II below), giving rise to a large debt collection industry.…”

“…These papers lay theoretical foundations for the prevalent use of persistent delinquency as a form of default. On the empirical side, our model builds on the evidence documented by Dawsey and Ausubel (2004) and Agarwal, Liu, and Mielnicki (2003), which we extend in Section II.…”

Loan Guarantees for Consumer Credit Markets

“…12 Because of the breadth of costs that λ represents, we will allow it to vary stochastically over time, and across individuals as a function of their type y.…”

“…Loan-guarantees also play a role in credit aimed at the self-employed, with the U.S. Small Business Administration's (SBA) 7a loan program guaranteeing roughly $100 billion in credit per decade since 1990. 12 Beyond their sheer size, the scope of activities receiving guarantees is noteworthy. Endeavors ranging from nuclear and solar power plant construction, trade credit, micro-enterprises, and support for female-entrepreneurs are all ones that have received, or currently receive, guaranteed loans.…”