Debtor careers before and after consumer insolvency. Is there a "fresh start"?

ÖAW

This project focuses on personal bankruptcies in Austria. Consumer insolvency proceedings enable debtors with unsustainable debts to obtain debt discharge under certain conditions. In Austria, a personal bankruptcy procedure with debt discharge is available since 1995. Given the large role private debt plays in modern society, consumer insolvency proceedings are an important element of social and economic policy with effects on multiple outcomes such as health, entrepreneurial activity, and labor market participation. Yet, there is surprisingly little high-quality evidence on the causes and consequences of personal bankruptcy for countries other than the United States.

Moreover, the more recent past has witnessed multiple crises (Covid-19 pandemic, high inflation, high interest rates) which all potentially impact on household debt and consumer insolvency. Due to various regulations and cash transfers the welfare state in Austria managed to buffer short-term financial problems for most households during the Covid years and the period of high inflation. However, the mid- to long-term impact of these crises on household debt and private bankruptcies is yet rather unknown.

We address these research gaps by focusing on two questions:

First, we ask what employment and marital status histories can be observed among the population of insolvent consumers prior to insolvency. How are “critical changes” (potential financial shocks) in the employment and marital status (e.g. unemployment, divorce) associated with the likelihood of consumer insolvency? Is it a rather long or short path into consumer insolvency after such events? More generally: are there typical patterns of routes into insolvency?

Second, we are interested in employment outcomes and marital/family status after insolvency proceedings have started. How do labor market, income and marital status spells develop after the initiation/completion of bankruptcy proceedings? Are personal bankruptcies a recurring phenomenon for the formerly insolvent? Our data also allow us to examine former entrepreneurs’ employment (self-employment) trajectories after personal bankruptcy, e.g., to investigate if they become entrepreneurs again. How likely is a “fresh start” for them?

To address our research questions, we link register data on consumer insolvencies with register data on employment, marital status, and income. We then apply sequence analysis and estimate panel regressions (event study designs) and instrumental variable regressions to learn about typical trajectories, entry and exit dynamics. Furthermore, we attempt to utilize variation in bankruptcy policy to identify its causal effects on employment, income and marital status.

Our project also provides pioneering work by linking anonymized data on consumer insolvencies with registers for income, family status and employment trajectories.