bepress Legal Repository

The Regulation of Non-Judicial Debt Collection and the Consumer's Choice Among Repayment, Bankruptcy and Informal Bankruptcy

Amanda E. Dawsey, University of Montana Economics Department
Richard M. Hynes, University of Virginia School of Law
Lawrence M. Ausubel, University of Maryland Economics Dept

Abstract

Most consumers who default on their debts do not file for bankruptcy. Rather, they simply stop making payments and preserve the option to repay later or file for bankruptcy if pressure from their creditors becomes too great. Creditors’ ability to exert pressure on consumers varies considerably from state to state.

Prior literature has explored the effects of laws that restrict the ability of creditors to use state court proceedings to seize the debtor’s property or garnish the debtor’s wages. However, most consumer debt collection takes place outside of the courtroom, but not beyond the reach of the law. The Fair Debt Collections Practices Act prohibits collection techniques that are designed to harass the debtor or that are deemed abusive. However, this federal law applies only to third party debt collectors and creditors who purchased the debt after default; the original creditors are largely exempt from its provisions. About half of the states have tried to fill this gap by also prohibiting the original creditor from engaging in harassing or abusive behavior, enacting statutes that grant a consumer a private right of action against the original creditor.

This Article finds that states that have enacted one of these anti-harassment statutes have significantly lower bankruptcy filing rates. In addition, we find that borrowers living in these states are more likely to default without filing for bankruptcy. This suggests that these (or related) laws may reduce the ability of creditors to pressure their debtors to repay.

Subject Area

Bankruptcy Law, Law and Economics

Recommended Citation

Amanda E. Dawsey, Richard M. Hynes, and Lawrence M. Ausubel, "The Regulation of Non-Judicial Debt Collection and the Consumer's Choice Among Repayment, Bankruptcy and Informal Bankruptcy" (February 2008). University of Virginia Legal Working Paper Series. University of Virginia John M. Olin Program in Law and Economics Working Paper Series. Working Paper 42.
http://law.bepress.com/uvalwps/olin/art42

No readers' reactions have been posted for this article. To submit one, copy the URL for this article (http://law.bepress.com/uvalwps/olin/art42) and click here.