Non-Judicial Debt Collection and the Consumer’s Choice Among Repayment, Bankruptcy and Informal Bankruptcy
This article measures the impact of state laws on defaulting borrowers. Prior literature has assessed the impact of laws that limit the enforcement of judgments on bankruptcy filings. However, (1) the majority of defaulting consumers do not file for bankruptcy, and (2) most debt collection takes place outside of the courtroom. Federal law prohibits collection techniques that are designed to harass or that are deemed abusive, but it exempts creditors who originated the loan or purchased the loan before default. About half of the states have enacted statutes that grant consumers a private right of action against these creditors. This article finds that states with anti-harassment statutes have lower bankruptcy filing rates, but borrowers living in these states are more likely to default without filing for bankruptcy. Our results suggest that these (or related) laws may reduce creditors’ ability to pressure debtors to repay.