Formal versus Informal Default in Consumer Credit ∗

@inproceedings{MateosPlanas2011FormalVI,
  title={Formal versus Informal Default in Consumer Credit ∗},
  author={Xavier Mateos-Planas},
  year={2011}
}
This paper studies informal default (or delinquency) in consumer credit as a process involving negotiations over unpaid debts. We consider an economy with uninsurable individual risk where, as an alternative to informal default, households can also declare formal bankruptcy. Negotiated settlements, which may be reached with some delay, involve limited recovery, are often followed by further defaults, and may end in bankruptcy as households reduce their assets in the process. When calibrated to… CONTINUE READING

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