Short Term Effects of Households Debt Restructuring: Evidence from the French Experience

In some cases, debt relief might be efficient in decreasing household overindebtedness: it lowers the risk of re-default and ultimately leads to an increase in the expected value of the repayment. In other cases, it benefits households who would have been otherwise able to repay. In this paper, we assess whether French households are on the wrong side of the "debt Laffer curve" in the short term. When facing financial distress, households can file a case to a "households over-indebtedness commission" (HDC). The HDC can order an immediate repayment or grant a moratorium. We show that the cases are randomly allocated across case managers and that some case managers decide persistently more favorably towards households or creditors. Over a two-year horizon, a toucher manager on households leads to a 2 percentage points increase of the redefault rate but also to a 6 percentage point increase in the amount recovered by creditors at the agregate level. Our approach allows us identifying characteristics of the households related to lower return in asking a repayment. This provides case managers guidance for a more efficient bankruptcy process. JEL Codes: D1, G2, K35.