N° 29 : Household Debt Restructuring : The Re-default Effects of Debt Suspensions

The HDC can order an immediate repayment or grant a debt suspension. Exploiting the random assignment of bankruptcy filings to managers, we show that a debt suspension has a very significant and negative effect on the likelihood to re-default but that this impact is only short-lived. Five years after the decision - conditionally on not having previously re-defaulted - the probability of re-default is the same whether or not the household benefits from the grace period. For these households, the grace period therefore does not further disincentivize repayment, nor give sufficient relief to further decrease the risk of re-default. Our results imply that rather than focusing on a specific debt profile, above all a deeper restructuring of the expenditure side is necessary to make the plan sustainable. They also single out specific banks lending to particular fragile households. They indicate the importance of policy actions on budget counseling, as well as the importance of regulation of credit distribution to avoid both entering into bankruptcy and re-filing for bankruptcy.