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Information and credit access: using bankruptcy as a signal

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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.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840802112331

Affiliations: 1: Litigation Analytics, Inc., New York, NY, USA 2: Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, IL, USA

Publication date: October 1, 2010

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