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Households Debt Restructuring: The Re-default Effect of a Debt Suspension

Henri Fraisse

No 11032, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: When facing financial distress, French households can file a case to a "households' over-indebtedness commission" (HDC). The HDC can order an immediate repayment or grant a debt suspension. Exploiting the random assignment of bankruptcy filings to managers, we show that a debt suspension has a very significant and negative effect on the likelihood to re-default but that this impact is only short-lived. The effect depends not only on the characteristics of the households but also on the nature of their indebtedness. Our results imply that rather than focusing on a specific debt profile, above all a deeper restructuring of the expenditure side is necessary to make the plan sustainable. They also single out specific banks lending to particular fragile households. They indicate the importance of policy actions on budget counseling, as well as the importance of regulation of credit distribution to avoid both entering into bankruptcy and re-filing for bankruptcy.

Keywords: bankruptcy; household finance; default; debt restructuring (search for similar items in EconPapers)
JEL-codes: D G2 K35 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-law
Date: 2017-09
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