From Bad to Worse? Individuals in Financial Distress

In this paper, we examine the behavior of individual consumers in financial distress. We provide a novel description of consumer delinquency and investigate whether or not consumers recover from delinquency. We use a large data set from a German credit bureau containing the credit history of more than 500,000 anonymous individuals in Germany who became delinquent for the first time in 2007. We observe changes in their arrears on a quarterly basis over the 2007 to June 2010 period. Our results show that younger consumers are more likely to fall behind on payments to telecommunication firms and older consumers on payments to financial institutions. The median arrears of the first delinquency event is €599 and there is substantial cross-sectional variation with respect to creditor (and debt) type. Repayment performance differs by level of initial arrears and number of delinquency events as well as by age, creditor type, and socioeconomic environment. We construct a repayment performance measure that combines repayment speed with actual repayments. We show that medium-age bank debtors have the highest repayment performance, although they have at the same time the highest bankruptcy risk. An understanding of individual behavior during financial distress is important for the design and implementation of policy tools to support these individuals and to prevent distress.

Steffen, Sascha, David M. Becker and Martin Weber (2015), From Bad to Worse? Individuals in Financial Distress,