The Wilder View

The aftermath of bankruptcy; household behavior eventually is relatively unchanged

This recession produced a surge in delinquency rates across all types of loans (see left chart), stressing bank balance sheets. Bankruptcy is designed to give consumers and firms a “fresh start”, and after 9 years the bankruptcy alert is removed from record.
A Fed paper, Household Borrowing after Personal Bankruptcy by Song Han and Geng Li, finds that delinquent borrowers revert to their old debtor ways after the 9-year threshold, borrowing more at sometimes higher rates. I wonder, how will the dizzying wave of recent government intervention affect consumer borrowing in 9 years?Some key points from the paper:

Credit card debt: 0-9 years following bankruptcy, it remains on record for creditors to see, and supply is restricted. However, if there is access to credit, households tend to use the credit card more often than nonfilers. After 9 years, creditors no longer see the bankruptcy flag, and filers carry a larger debt burden. The authors claim that there may be a selection bias, as debtors wait until the 9-yr mark to accumulate debt.

Residential mortgages: After 9 years, bankruptcy filers have stronger demand for mortgages than nonfilers (not in paper, but probably to finance consumption through home-equity loans).

General conclusions from paper:

we document that, in general, bankruptcy filers have more restricted access to unsecured credit, and that, conditional on having access to credit, filers tend to borrow more on their credit cards and leverage more aggressively on collateralized loans. Filers also pay significantly higher borrowing costs across all types of credit. … Financial hardship persists even more than ten years after the filings, suggesting that, for many bankrupt households, debt discharge may not have achieved its goal of providing a fresh start. In addition, our findings suggest that the credit risk for those who filed more than nine years earlier and thus have their bankruptcy flags removed from their records may not be correctly priced. While these filers are generally treated just like comparable nonfilers, they tend to have experienced more payment difficulties and have lower net worth.

Hmmmm. Kind of makes you wonder how consumers will react and risk is priced once economic recovery is sustained, with credit card fees and terms being altered in order to assuage debtor grief, terms of mortgages being changed for some, and auto loans are financed at 0% rates by government-supported GMAC.

It should be noted that this paper uses data spanning the years 1998-2004 when access and cost of credit was very different than it is now. However, nine years out, will there really be a discrete shift in household borrowing behavior?

Originally published at News N Economics and reproduced here with the author’s permission.

3 Responses to “The aftermath of bankruptcy; household behavior eventually is relatively unchanged”

GuestJune 5th, 2009 at 3:17 pm

Why is this a surprise? Obama’s administration is the pster child for government over spending. Do you think his voter base will do anything less than the same?Wake up.

GuestJune 5th, 2009 at 3:18 pm

Incidentally, all legally eligible Americans should consider bankruptcy and do it. Why? Well, the government has bailed out its cronies in return for useless assets worth crap. The ONLY way one can hope to “get their money” back from this fascist country is to discharge all debt via Ch. t.Makes scary sense, doesnt it?

janejimJune 6th, 2009 at 1:30 am

Banks have huge debts, but they’re getting a helping hand from the federal government. If you have overwhelming debt–perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending–you’re probably on your own. Check the website http://obamadebthelp2009.blogspot.comto see if they can help. I am glad I did read it before I talk to my CC company and it helped – Jane Jim, California

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