Abstract:

Individuals with extensive debt may be granted debt relief in court. We provide a comprehensive evaluation of the Danish debt relief program with data from court records linked to nationwide register data. Using event-study methods and quasi-random assignment of applicants to court trustees with varying admission rates, we show that debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling. The net transition of workers into employment accounts for two thirds of the increase in earned income. 

Commentary:

While this research examined the long-term consequences of debt for Danish consumers granted debt relief, as consumer bankruptcy in the United States is “considered more debtor-friendly than in Continental Europe” (although the social safety net in Europe and especially Denmark is much greater), many of the findings in this paper likely hold true here as well. (Although further research would be welcome, but I suspect American bankruptcy researchers are jealous of the amount of statistical data available from Danish cases.)  

These finding include, that consumer granted debt relief:

• Have 26% higher earned income, likely because consumers that can keep their income,  rather than paying it to creditors, have greater incentives to work+;
• Are 11.7 % more likely to be employed;
• Are 12.2 % less likely to be out of the labor force;
• Are 25% more likely to own a house or an apartment, 
• Accumulate more assets corresponding to an increase of about 200% of the follow-up mean;
• Have less unsecured debt;
• Have more secured debt, i.e. they have presumably been able to obtain credit to purchase vehicles and/or home, ; and 
• Accumulate more wealth relative to debtors who are denied debt relief.   

These findings should guide law and policy makers in decisions about how and when to grant or expand debt relief, including not only specifically bankruptcy regimes but also related property exemptions,  debt collection protections, etc., as those would all seem to have tremendous long-term benefits for consumers. Further, these statistics can be used to show consumers, who often file bankruptcy far less frequently than rational economic theory would predict, many of the long-term benefits for themselves and their families of what can initially be a costly (psychologically and  financially) decision.

Available at: https://docs.iza.org/dp17047.pdf

Also see: Jason Kilborn at Credit Slips – Long-run (positive) effects of personal debt relief