Households Debt Restructuring: The Re-default Effects of a Debt Suspension

When facing financial distress, French households can file a case to a "house-holds' over-indebtedness commission" (HDC). 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. The effect depends not only on the characteristics of the households but also on the nature of their indebtedness. 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 in case of an uniform increase of the HDC severity. 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.