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Information and credit access: using bankruptcy as a signal

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  • Jonathan Fisher
  • Angela Lyons

Abstract

Legally, a bankruptcy flag can appear on an individual's credit report for up to 10 years after the filing. The flag affects an individual's credit score, and in turn, an individual's access to credit. In this article, we investigate how the bankruptcy flag affects access to credit along three dimensions-loan acceptance, the price of the loan as is determined by the interest rate, and the amount of credit the household receives. Using the Panel Study of Income Dynamics and the Survey of Consumer Finances, we estimate a series of two-stage models corrected for sample selection and adjusted to account for the household's level of creditworthiness. We find that the bankruptcy flag increases the probability of being denied access to a loan. The flag also increases interest rates for unsecured loans and lowers the credit limits available to households. The findings have important implications with respect to current bankruptcy code and the impact that information, such as the bankruptcy flag, can have on the efficiency of the credit markets.

Suggested Citation

  • Jonathan Fisher & Angela Lyons, 2010. "Information and credit access: using bankruptcy as a signal," Applied Economics, Taylor & Francis Journals, vol. 42(25), pages 3175-3193.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:25:p:3175-3193
    DOI: 10.1080/00036840802112331
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Jonathan D. Fisher, 2019. "Who Files for Personal Bankruptcy in the United States?," Journal of Consumer Affairs, Wiley Blackwell, vol. 53(4), pages 2003-2026, December.
    2. Jonathan D. Fisher, 2020. "Social Influence And The Consumer Bankruptcy Decision," Contemporary Economic Policy, Western Economic Association International, vol. 38(3), pages 474-482, July.

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