How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements

Do deals with debt collectors alleviate consumer financial distress? Using new data linking court and credit registry records, we examine civil collection lawsuits where consumers can settle out of court. Random assignment of judges with different styles generates exogenous variation in the likelihood of settlement negotiations. We find that settlements increase financial distress relative to going to court, likely by draining consumers of liquidity. The effect is stronger among less financially literate consumers. Survey evidence suggests that consumers generally overestimate how much they would pay through the court system. Some consumers are also motivated to settle by perceived non-pecuniary benefits.

Keywords: debt collection, negotiation, financial settlements

JEL Classification: D14, D18, G00

Suggested Citation: Suggested Citation

Cheng, Ing-Haw and Severino, Felipe and Townsend, Richard, How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements (May 18, 2020). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3312448 or http://dx.doi.org/10.2139/ssrn.3312448