Monitoring the Household Sector with Aggregate Credit Bureau Data

Business Economics, Jan, 2000 by John M. Barron, Gregory Elliehausen, Michael E. Staten

The inclusion of the number of revolving accounts in addition to the total amount of debt is a proxy for the average level of risk of the population of debtors in the county, as reflected in creditor supply decisions. Creditors view individual credit files to assess individual risk and make their lending decisions accordingly. A decision to extend a revolving line with a lower limit signals a creditor s assessment that the borrower is riskier, relative to a second borrower who received a higher limit. Consequently, an increase in the number of accounts in an area, holding constant the total amount of household debt, implies a riskier population and higher likelihood of bankruptcy. [7]

Independent variables that capture household vulnerability to insolvency events include the state-level unemployment rate, change in unemployment rate from the prior year, the proportion of individuals divorced or separated, proportion of households with at least some health insurance, the value of housing, and the proportion of individuals over the age of fifty. Bankruptcy filing rates are hypothesized to rise with both unemployment and the divorce rate. Bankruptcies should fall as more of the population is covered by health insurance. The market value of housing, when coupled with average mortgage debt, reflects the average amount of home equity. This serves as a proxy for (1) the level of household assets available as a cushion against income interruptions or expense shocks, (2) how much equity value would be given up in a Chapter 7 bankruptcy (which requires liquidation of nonexempt assets in order to pay off creditors), and (3) the general level of risk of borrowers in the area. All three interpretation s imply the same expectation: Higher average house values imply smaller likelihood of bankruptcy, other factors held constant. Finally, a higher proportion of borrowers over the age of fifty should reduce the bankruptcy filing rate. Asset holdings and net worth rise with age. Consequently, older borrowers are less vulnerable to external income and expense shocks because they tend to have more assets available for liquidation.

Variables that capture the effects of social and economic stigma include population density, the proportion of households over the age of fifty, a dummy variable for counties in states with an unlimited bankruptcy homestead exemption, a dummy variable for counties in states that exempt delinquent debtors from wage garnishment, and a set of time dummies for 1994-1998. County population density reflects the effect of anonymity in reducing the reputational costs of filing for bankruptcy in more densely populated areas. Consequently, counties with higher population density should experience higher filing rates. Conversely, social stigma is hypothesized to be higher for older borrowers, whose attitudes were formed decades earlier during a period when bankruptcies were far less common. Counties with older borrowers should experience lower filing rates.