How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements

Review of Financial Studies, Forthcoming

86 Pages Posted: 24 Jan 2019 Last revised: 22 May 2020

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

University of Toronto - Rotman School of Management

Felipe Severino

Dartmouth College - Tuck School of Business

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management

Date Written: May 18, 2020

Abstract

Do deals with debt collectors alleviate consumer financial distress? Using new data linking court and credit registry records, we examine civil collection lawsuits where consumers can settle out of court. Random assignment of judges with different styles generates exogenous variation in the likelihood of settlement negotiations. We find that settlements increase financial distress relative to going to court, likely by draining consumers of liquidity. The effect is stronger among less financially literate consumers. Survey evidence suggests that consumers generally overestimate how much they would pay through the court system. Some consumers are also motivated to settle by perceived non-pecuniary benefits.

Keywords: debt collection, negotiation, financial settlements

JEL Classification: D14, D18, G00

Suggested Citation

Cheng, Ing-Haw and Severino, Felipe and Townsend, Richard, How Do Consumers Fare When Dealing with Debt Collectors? Evidence from Out-of-Court Settlements (May 18, 2020). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3312448 or http://dx.doi.org/10.2139/ssrn.3312448

Ing-Haw Cheng (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://inghawcheng.github.io

Felipe Severino

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://fseverino.host.dartmouth.edu

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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