How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements

Why don’t lenders renegotiate more home mortgages? Redefaults, self-cures and securitization

Ing-Haw Cheng, Felipe Severino, Richard R Townsend and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2021, vol. 34, issue 4, 1617-1660

Abstract: Do deals with debt collectors alleviate consumer financial distress? Using new data linking court and credit registry records, we examine civil collection lawsuits where consumers can settle out of court. Random assignment of judges with different styles generates exogenous variation in the likelihood of settlement negotiations. We find that settlements increase financial distress relative to going to court, likely by draining consumers of liquidity. The effect is stronger among less financially literate consumers. Survey evidence suggests that consumers generally overestimate how much they would pay through the court system. Perceived nonpecuniary benefits also motivate some consumers to settle.

JEL-codes: D14 D18 G51 G53 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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