Bankruptcy and Delinquency in a Model of Unsecured Debt

59 Pages Posted: 2 Dec 2016

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Xuan S. Tam

City University of Hong Kong

Eric R. Young

University of Virginia

Multiple version iconThere are 4 versions of this paper

Date Written: 2016-12-01

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.

JEL Classification: E43, E44, G33

Suggested Citation

Athreya, Kartik and Sanchez, Juan M. and Tam, Xuan S. and Young, Eric R., Bankruptcy and Delinquency in a Model of Unsecured Debt (2016-12-01). FRB Richmond Working Paper No. 16-12, Available at SSRN: https://ssrn.com/abstract=2879281

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Xuan S. Tam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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