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

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

Felipe Severino

Dartmouth College - Tuck School of Business

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management

Date Written: April 16, 2019

Abstract

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

Cheng, Ing-Haw and Severino, Felipe and Townsend, Richard, How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements (April 16, 2019). Available at SSRN: https://ssrn.com/abstract=3312448 or http://dx.doi.org/10.2139/ssrn.3312448

Ing-Haw Cheng (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Felipe Severino

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.dartmouth.edu/~fseverino

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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