IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v37y2013i12p5101-5117.html
   My bibliography  Save this article

Who gets credit after bankruptcy and why? An information channel

Author

Listed:
  • Cohen-Cole, Ethan
  • Duygan-Bump, Burcu
  • Montoriol-Garriga, Judit

Abstract

Conventional wisdom holds that individuals find it difficult to obtain new credit post-bankruptcy. Using credit bureau data, we test this hypothesis and show that more than 90% of bankrupt individuals receive credit shortly after filing. Individuals with good credit history prior to filing have reduced credit availability after bankruptcy while those with ex-ante low credit quality receive more credit. We show that credit supplied to low quality individuals is severely curtailed during the financial crisis. We also find that the default probability on new debt increases after bankruptcy, especially among individuals with high ex-ante credit score. These findings are consistent with an information channel, in which bankruptcy reveals new information about a borrower’s credit quality.

Suggested Citation

  • Cohen-Cole, Ethan & Duygan-Bump, Burcu & Montoriol-Garriga, Judit, 2013. "Who gets credit after bankruptcy and why? An information channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5101-5117.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5101-5117
    DOI: 10.1016/j.jbankfin.2013.07.036
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426613003117
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2013.07.036?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-385, May.
    2. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 217-251.
    3. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    4. David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, vol. 77(4), pages 725-748, October.
    5. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    6. Sumit Agarwal, 2010. "Distance and Private Information in Lending," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    7. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
    8. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    9. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    10. Ethan Cohen-Cole, 2008. "Credit card redlining," Supervisory Research and Analysis Working Papers QAU08-1, Federal Reserve Bank of Boston.
    11. Ethan Cohen-Cole, 2011. "Credit Card Redlining," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 700-713, May.
    12. Jonathan Fisher & Larry Filer & Angela Lyons, "undated". "Is the Bankruptcy Flag Binding? Access to Credit Markets for Post-Bankruptcy Households," American Law & Economics Association Annual Meetings 1041, American Law & Economics Association.
    13. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
    14. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    15. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    16. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lei Ding, 2016. "Borrower Credit Access And Credit Performance After Loan Modifications," Working Papers 16-26, Federal Reserve Bank of Philadelphia.
    2. Will Dobbie & Paul Goldsmith-Pinkham & Crystal S. Yang, 2017. "Consumer Bankruptcy and Financial Health," The Review of Economics and Statistics, MIT Press, vol. 99(5), pages 853-869, December.
    3. Danisewicz, Piotr & Elard, Ilaf, 2023. "The real effects of financial technology: Marketplace lending and personal bankruptcy," Journal of Banking & Finance, Elsevier, vol. 155(C).
    4. Herkenhoff, Kyle & Phillips, Gordon M. & Cohen-Cole, Ethan, 2021. "The impact of consumer credit access on self-employment and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 141(1), pages 345-371.
    5. Lei Ding, 2017. "Borrower credit access and credit performance after loan modifications," Empirical Economics, Springer, vol. 52(3), pages 977-1005, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Song Han & Benjamin J. Keys & Geng Li, 2011. "Credit supply to personal bankruptcy filers: evidence from credit card mailings," Finance and Economics Discussion Series 2011-29, Board of Governors of the Federal Reserve System (U.S.).
    2. Danisewicz, Piotr & Elard, Ilaf, 2023. "The real effects of financial technology: Marketplace lending and personal bankruptcy," Journal of Banking & Finance, Elsevier, vol. 155(C).
    3. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    4. Ethan Cohen-Cole & Burcu Duygan-Bump, 2008. "Household bankruptcy decision: the role of social stigma vs. information sharing," Supervisory Research and Analysis Working Papers QAU08-6, Federal Reserve Bank of Boston.
    5. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    6. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.
    7. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    8. Benjamin J. Keys, 2018. "The Credit Market Consequences of Job Displacement," The Review of Economics and Statistics, MIT Press, vol. 100(3), pages 405-415, July.
    9. Chintal Desai & Andre Mollick, 2014. "On Consumer Credit Outcomes in the U.S.-Mexico Border Region," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(1), pages 91-115, February.
    10. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
    11. Ethan Cohen-Cole, 2009. "The option value of consumer bankruptcy," Supervisory Research and Analysis Working Papers QAU09-1, Federal Reserve Bank of Boston.
    12. Vyacheslav Mikhed & Barry Scholnick, 2014. "Financial benefits, travel costs, and bankruptcy," Working Papers 14-18, Federal Reserve Bank of Philadelphia.
    13. Viktar Fedaseyeu & Robert M. Hunt, 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    14. Will Dobbie & Paul Goldsmith‐Pinkham & Neale Mahoney & Jae Song, 2020. "Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports," Journal of Finance, American Finance Association, vol. 75(5), pages 2377-2419, October.
    15. Hyungsuk Byun & Barry Scholnick, 2017. "Spatial Commitment Devices and Addictive Goods: Evidence from the Removal of Slot Machines from Bars," Working Papers 17-34, Federal Reserve Bank of Philadelphia.
    16. Claus Thustrup Kreiner & Søren Leth-Petersen & Louise Charlotte Willerslev-Olsen, 2020. "Financial Trouble Across Generations: Evidence from the Universe of Personal Loans in Denmark," The Economic Journal, Royal Economic Society, vol. 130(625), pages 233-262.
    17. Nakajima, Makoto, 2017. "Assessing bankruptcy reform in a model with temptation and equilibrium default," Journal of Public Economics, Elsevier, vol. 145(C), pages 42-64.
    18. Régis Blazy & Bertrand Chopard & Eric Langlais & Ydriss Ziane, 2013. "Personal Bankruptcy Law, Fresh Starts, and Judicial Practice," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 680-702, December.
    19. Chloé Zapha & Banque de France, 2023. "Access to Credit after Emerging from Corporate Bankruptcy," Working Papers halshs-03957890, HAL.
    20. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

    More about this item

    Keywords

    Personal bankruptcy; Credit access; Information and lending; Consumer finance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5101-5117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.