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SUMMARY:CF Weekly Workshop - by Xuan Tam - Bankruptcy and Delinquency in a
  Model of Unsecured Debt  - Xuan Tam - CFAP\, Cambridge Judge Business Sch
 ool\, University of Cambridge
DTSTART:20121023T160000Z
DTEND:20121023T170000Z
UID:TALK40685@talks.cam.ac.uk
CONTACT:Sheryl Anderson
DESCRIPTION:Limited commitment for the repayment of consumer debt comes fr
 om two places:\n\nformal laws granting a partial or complete discharge for
  debts under certain circumstances\, or “bankruptcy\,” and informal de
 fault and renegotiation\, or “delinquency.” In the US\, both channels 
 are used routinely. The usefulness of each of these routes as a way out of
  debt depends on the costs and benefits available through the other: delin
 quency exposes a household to collections processes initiated by lenders\,
  while formal bankruptcy appears to carry more visible consequences for fu
 ture transactions\, including restrictions to even secured forms of credit
 . This paper is the first\, to our knowledge\, to evaluate unsecured consu
 mer credit markets in the presence of both bankruptcy and delinquency. We 
 show that these two options indeed interact in important ways. Specificall
 y\, we show that stricter control of delinquency\, as defined by a relativ
 ely high ability to garnish wages\, leads to more bankruptcy and lower wel
 fare. Similarly\, we find that eliminating the bankruptcy option altogethe
 r leads to a modest increase in delinquency. Perhaps most interestingly\, 
 we show that interest-rate ceilings\, even though they have the standard e
 ffects in terms of limiting credit access\, improve ex-ante welfare for al
 l. This occurs because the inability to reprice debt after delinquency all
 ows a useful level of “state contingency” in debt that does not increa
 se average borrowing costs substantially. In essence\, households have to 
 pay the costs of delinquency in order to get the benefits of a low interes
 t rate.\n\ntrinity-crop1.jpg\nManage portlets\n
LOCATION:Sidgwick Hall\, Newnham College
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