Forgive and Forget: Who Gets Credit after Bankruptcy and Why?

37 Pages Posted: 12 Feb 2009

See all articles by Ethan Cohen-Cole

Ethan Cohen-Cole

Econ One Research

Burcu Duygan-Bump

Board of Governors of the Federal Reserve System

Judit Montoriol-Garriga

Autonomous University of Barcelona - Department of Business Economics; La Caixa

Date Written: July 23, 2009


Conventional wisdom holds that individuals who have gone bankrupt face difficulties getting credit for at least some time. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy and its dependence on the credit cycle. Using data from one of the largest credit bureaus in the US, this paper makes three contributions. First, we show that individuals who file for bankruptcy are indeed penalized with limited credit access post-bankruptcy, but we find that this consequence is very short lived. Ninety percent of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 75% are given unsecured credit. Second, we show that those individuals who have the easiest access to credit after bankruptcy tend to be the ones who have shown previously the least ability and least propensity to repay their debt. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing. We interpret the widespread post-bankruptcy credit access and the differential credit provision across borrower types as evidence that lenders target riskier borrowers. Employing a simple theoretical framework we show that this interpretation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status. This interpretation is also in line with survey evidence that shows lenders repeatedly solicit debtors to borrow after bankruptcy, especially with offers of revolving credit. Finally, we show that our findings depend heavily on the aggregate credit environment: the ease of credit and limited bankruptcy credit cost observed in the initial period of our data (2003-2004) become much less significant when we repeat the analyses in 2007, as the recent credit downturn began.

Keywords: post-bankruptcy credit

JEL Classification: D14, I30, K45

Suggested Citation

Cohen-Cole, Ethan and Duygan-Bump, Burcu and Montoriol-Garriga, Judit and Montoriol-Garriga, Judit, Forgive and Forget: Who Gets Credit after Bankruptcy and Why? (July 23, 2009). EFA 2009 Bergen Meetings Paper, Available at SSRN: or

Ethan Cohen-Cole (Contact Author)

Econ One Research ( email )

United States

Burcu Duygan-Bump

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2029124663 (Phone)

Judit Montoriol-Garriga

La Caixa ( email )

Av Diagonal 629
Barcelona, 08028

Autonomous University of Barcelona - Department of Business Economics ( email )

Edifici B - Campus de la UAB
Bellaterra (Cerdanyola del Vallès)
Barcelona, Barcelona 08193


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