Bankruptcy and delinquency in a model of unsecured debt

Kartik Athreya, Juan Sanchez, Xuan Tam () and Eric Young

No 2012-042, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper documents and interprets two facts central to the dynamics of informal default or ?delinquency? on unsecured consumer debt. First, delinquency does not mean a persistent cessation of payment. In particular, we observe that for individuals 60 to 90 days late on payments, 85% make payments during the next quarter that allow them to avoid entering more severe delinquency. Second, many in delinquency (40%) have smaller debt obligations one quarter later. To understand these facts, we develop a theoretically and institutionally plausible model of debt delinquency and bankruptcy. Our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently (in roughly 40% of cases) reset the terms for delinquent borrowers, typically involving partial debt forgiveness, rather than a blanket imposition of the ?penalty rates? most unsecured credit contracts specify.

Keywords: Consumer Debt; Bankruptcy; Default; Life cycle; Idiosyncratic risk (search for similar items in EconPapers)
JEL-codes: E43 E44 G33 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-dge
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: BANKRUPTCY AND DELINQUENCY IN A MODEL OF UNSECURED DEBT (2018)
Working Paper: Bankruptcy and Delinquency in a Model of Unsecured Debt (2016)
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DOI: 10.20955/wp.2012.042

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