Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending

Abstract

Consumer credit and consumer bankruptcy filings have grown rapidly over the last two decades, and several researchers have attempted to understand the relationship between these two intertwined features of the modern American economy. Teasing out causation is almost impossible, as consumer advocates lay blame on the industry and the industry responds by citing the same data to show consumer misbehavior. Using a novel vantage point, this analysis examines what the credit industry's behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy. The empirical evidence on postbankruptcy credit solicitation belies the industry's characterizations of bankrupt families as opportunistic or strategic actors. Original data from longitudinal interviews with consumer debtors show that many lenders target recent bankrupts, sending these families repeated offers for unsecured and secured loans. The modern credit industry sees bankrupt families as lucrative targets for high-yield lending, a reality that has important implications for developing optimal consumer credit policy and bankruptcy law.

Keywords: bankruptcy, consumer credit, credit cards, consumer law, credit markets

JEL Classification: D12, G33, G21