Forgive and Forget: Who Gets Credit after Bankruptcy and Why?

Conventional wisdom holds that individuals who have gone bankrupt face difculties getting credit for at least some time. However, there is very little non-survey based empirical evidence on the availabil- ity of credit post-bankruptcy and its dependence on the credit cycle. Using data from one of the largest credit bureaus in the US, this paper makes three contributions. First, we show that individuals whole for bankruptcy are indeed penalized with limited credit access post-bankruptcy, but wend that this con- sequence is very short lived. Ninety percent of individuals have access to some sort of credit within the 18 months afterling for bankruptcy, and 75% are given unsecured credit. Second, we show that those individuals who have the easiest access to credit after bankruptcy tend to be the ones who have shown previously the least ability and least propensity to repay their debt. In fact, a signicant fraction of indi- viduals at the bottom of the credit quality spectrum seem to receive more credit afterling. We interpret the widespread post-bankruptcy credit access and the differential credit provision across borrower types as evidence that lenders target riskier borrowers. Employing a simple theoretical framework we show that this interpretation is consistent with a prot maximizing lender whose optimal strategy involves seg- menting borrowers by observable credit quality and bankruptcy status. This interpretation is also in line with survey evidence that shows lenders repeatedly solicit debtors to borrow after bankruptcy, especially with offers of revolving credit. Finally, we show that ourndings depend heavily on the aggregate credit environment: the ease of credit and limited bankruptcy credit cost observed in the initial period of our data (2003-2004) become much less signicant when we repeat the analyses in 2007, as the recent credit downturn began.