Debtor income manipulation in consumer credit contracts

Vyacheslav Mikhed, Sahil Raina, Barry Scholnick and Man Zhang

Journal of Financial Economics, 2024, vol. 157, issue C

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.

Keywords: Consumer credit; Data misreporting; Financial distress; Default (search for similar items in EconPapers)
JEL-codes: D82 G21 G51 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:157:y:2024:i:c:s0304405x24000746

DOI: 10.1016/j.jfineco.2024.103851

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