Friends with Bankruptcy Protection Benefits

Abstract

We show information spillovers limit the effectiveness of targeted debt relief programs. We study individuals who learn about the likelihood of debt relief from the recent experiences of workplace peers filing for bankruptcy protection. Peers granted bankruptcy can discharge debts, while peers facing dismissal lose all protections. Exploiting the random assignment of judges to bankruptcy cases, we determine that individuals with a "dismissed peer'' are significantly less likely to file for bankruptcy or enter foreclosure. We highlight a novel channel relating social networks to household finances and identify additional costs of granting individual debt relief imposed on lenders.

Keywords: Debt Relief, Personal Bankruptcy, Foreclosure, Peer Effects, Social Networks, Bankruptcy Judges, Random Assignment

JEL Classification: K35, G4, G33, G32, M5, C9