How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements
45 Pages Posted: 24 Jan 2019 Last revised: 19 Apr 2019
Date Written: April 16, 2019
We test whether consumers experience increased or decreased subsequent financial distress when they settle with debt collectors. We examine new data on civil collection lawsuits where consumers can settle out-of-court. Random assignment of judges with different styles generates exogenous variation in the likelihood of negotiation. Using linked credit registry data, we find evidence that settlements cause increased financial distress, without clearly benefiting consumers through improved access to credit, collector concessions, or avoidance of uncertainty. Consumers experience more distress when making deals with experienced collectors. Overall, the evidence suggests that consumers strike deals that worsen financial distress with unclear benefits.
Keywords: debt collection, negotiation, financial settlements
JEL Classification: D14, D18, G00
Suggested Citation: Suggested Citation