Excessive household debt contributed to the worst recession in decades. Insights about borrowing and spending behavior can inform economic recovery forecasts, policy decisions, and financial education. This study identifies life cycle and credit attitude as key determinants of who uses debt. Younger households are more likely to borrow for consumption, as are those who believe that it is all right to borrow to purchase luxury goods or cover living expenses. Furthermore, households that condone borrowing for these purposes have a higher consumer debt burden. Debt capacity (or creditworthiness) and financial discipline are also significant factors in determining household debt use
Using the 2007–2009 Survey of Consumer Finances panel data, this study examined changes in perceived and realized risk tolerance after the financial crisis. Households who perceived less risk tolerance were more likely to have reduced their portfolio risk and vice versa. Furthermore, households whose wealth decreased were more likely to perceive less risk tolerance and vice versa. Regression analysis revealed that change in risk tolerance as measured by the change in financial portfolio risk is related to perceived risk tolerance, education, life cycle stage, and employment status. Single households, or those households whose head is less educated, or self-employed or unemployed, may need financial advice to prevent them from reducing their portfolio risk in reaction to a financial crisis.
The purpose of this analysis is to identify the legal, environmental, and economic characteristics of debtors that are predictive of their Bankruptcy Code choices. The probability that debtors file under the rehabilitation procedure provided by the Bankruptcy Code (Chapter 13) is influenced by the availability of credit counseling as an alternative to bankruptcy and by the adverse effects of a liquidation bankruptcy (Chapter 7) on future ability to qualify for consumer and mortgage credit. More generous state laws protecting debtors' assets from liquidation in Chapter 7 have a negative effect on the probability that a debtor will contract to repay some debts out of future income in Chapter 13. The results also suggest that the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, which restricted Chapter 13 plans providing zero repayment of unsecured debts, precipitated a decline in the probability that nonbusiness debtors would choose the rehabilitation alternative.
The value of the option to default on unsecured credit contracts is estimated and found to be significantly impacted by state and federal laws governing creditors' collection practices and bankruptcy. The data suggest that the expected value of the option to default influences debtors' choices in default and is correlated with their use of their credit cards before default. Cardholders who use their lines of credit very intensely before default are significantly more likely to make choices in default which allow them to realize a greater benefit from default. Furthermore, these results offer a possible explanation for consumers' seeming insensitivity to interest rates charged on revolving lines of credit.
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