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Forgive and forget: who gets credit after bankruptcy and why?

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Author Info

  • Ethan Cohen-Cole
  • Burcu Duygan-Bump
  • Judit Montoriol-Garriga

Abstract

Conventional wisdom about individuals who have gone bankrupt is that they find it very difficult to get credit for at least some time after their bankruptcy. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy. This paper makes two contributions using data from one of the largest credit bureaus in the US. First, we show that individuals who file for bankruptcy can indeed get credit very quickly after they file. Indeed, 90% of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 66% have unsecured credit. Second, we show that those individuals who are effectively the least punished and can get the easiest access to credit after bankruptcy tend to be the ones who have shown the least ability and propensity to repay their debt prior to declaring bankruptcy. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing than before. We interpret the widespread credit access and the difference in credit provision across borrower types as evidence that lenders target at-risk borrowers. By means of a simple stylized model we show that this observation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status and that offers credit contracts to each group. This interpretation is also in line with survey evidence that shows that lenders repeatedly solicit debtors to borrow after bankruptcy, with unsecured credit card being the easiest one to obtain.

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File URL: http://www.bostonfed.org/bankinfo/qau/wp/2009/qau0902.htm
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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU09-2.

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Date of creation: 2009
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Handle: RePEc:fip:fedbqu:qau09-2

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Related research

Keywords: Bankruptcy ; Credit;

This paper has been announced in the following NEP Reports:

References

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  1. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  2. David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, vol. 77(4), pages 725-748, October.
  3. Song Han & Geng Li, 2009. "Household borrowing after personal bankruptcy," Finance and Economics Discussion Series 2009-17, Board of Governors of the Federal Reserve System (U.S.).
  4. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
  5. Jonathan Fisher & Larry Filer & Angela Lyons, . "Is the Bankruptcy Flag Binding? Access to Credit Markets for Post-Bankruptcy Households," American Law & Economics Association Annual Meetings 1041, American Law & Economics Association.
  6. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets," Working Papers 2006-01, Banco de México.
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Citations

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Cited by:
  1. Bonfim, Diana & Dias, Daniel A. & Richmond, Christine, 2012. "What happens after corporate default? Stylized facts on access to credit," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2007-2025.
  2. Régis Blazy & Bertrand Chopard & Eric Langlais & Ydriss Ziane, 2011. "Personal Bankruptcy Law, Fresh Starts, and Judicial Practice," EconomiX Working Papers 2011-15, University of Paris West - Nanterre la Défense, EconomiX.
  3. Diana Bonfim & Daniel Dias & Christine Richmond, 2010. "Access to Bank Credit after Corporate Default," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. Julapa Jagtiani & Wenli Li, 2013. "Credit access and credit performance after consumer bankruptcy filing: new evidence," Working Papers 13-24, Federal Reserve Bank of Philadelphia.
  5. Song Han & Benjamin J. Keys & Geng Li, 2011. "Credit supply to personal bankruptcy filers: evidence from credit card mailings," Finance and Economics Discussion Series 2011-29, Board of Governors of the Federal Reserve System (U.S.).
  6. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Régis Blazy & Bertrand Chopard & Eric Langlais & Ydriss Ziane, 2012. "L’effacement des dettes des particuliers surendettés : Une étude empirique des décisions judiciaires," EconomiX Working Papers 2012-10, University of Paris West - Nanterre la Défense, EconomiX.
  8. William Hedberg & John Krainer, 2012. "Credit access following a mortgage default," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct29.
  9. Mathur, Aparna, 2013. "Beyond bankruptcy: Does the US bankruptcy code provide a fresh start to entrepreneurs?," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4198-4216.
  10. Diana Bonfim & Daniel Dias & Christine Richmond, 2011. "What Happens After Default? Stylized Facts on Access to Credit," Working Papers w201101, Banco de Portugal, Economics and Research Department.
  11. Meta Brown & Andrew Haughwout & Donghoon Lee & Wilbert van der Klaauw, 2011. "Do we know what we owe? A comparison of borrower- and lender-reported consumer debt," Staff Reports 523, Federal Reserve Bank of New York.

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