Article2018

BANKRUPTCY AND DELINQUENCY IN A MODEL OF UNSECURED DEBT

Kartik B. Athreya · Juan M. Sánchez · Xuan S. Tam · Eric R. Young

45 citations0/0 files storedInternational Economic Review

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Banking stability, regulation, efficiency Financial Literacy, Pension, Retirement Analysis Corporate Insolvency and Governance

Abstract

Abstract This article documents and interprets a fact central to the dynamics of informal consumer debt default. We observe that for individuals 60– 90 days late on payments, (i) 85% make payments during the next quarter, and (ii) 40% reduce their debt. To understand these facts, we develop a quantitative model of debt delinquency and bankruptcy. Our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently reset loan terms for delinquent borrowers, typically offering partial debt forgiveness, instead of a blanket imposition of the “penalty rates” most unsecured credit contracts specify.

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References

2007Default Risk and Income Fluctuations in Emerging Economies 1994Precautionary Saving and Social Insurance 2007A Quantitative Theory of Unsecured Consumer Credit with Risk of Default 2007Consumer Bankruptcy: A Fresh Start 2003Wealth Accumulation Over the Life Cycle and Precautionary Savings 2009Long-duration bonds and sovereign defaults 2000The fragile middle class: Americans in debt 2010Wage Risk and Employment Risk over the Life Cycle

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