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Debtor income manipulation in consumer credit contracts

Author

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  • Mikhed, Vyacheslav
  • Raina, Sahil
  • Scholnick, Barry
  • Zhang, Man

Abstract

We show that forcing insolvent consumer debtors to repay a larger fraction of debt causes them to strategically manipulate the data they report to creditors. Exploiting a policy change that required insolvent debtors to increase debt repayments at an arbitrary income cutoff, we document that some debtors reduce reported income to just below this cutoff to avoid the higher repayment. Those debtors who manipulate income have a lower probability of default on their repayment plans, consistent with having access to hidden income. We estimate this strategic manipulation costs creditors 12% to 36% of their total payout per filing.

Suggested Citation

  • Mikhed, Vyacheslav & Raina, Sahil & Scholnick, Barry & Zhang, Man, 2024. "Debtor income manipulation in consumer credit contracts," Journal of Financial Economics, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:jfinec:v:157:y:2024:i:c:s0304405x24000746
    DOI: 10.1016/j.jfineco.2024.103851
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    More about this item

    Keywords

    Consumer credit; Data misreporting; Financial distress; Default;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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