Study of individual life trajectories after a soft default

An article co-authored by GSEM Professor Giacomo De Giorgi as well as University of Bern Professor Costanza Naguib has been published in the top-tier journal European Economic Review. The authors investigate the consequences of soft defaults on individuals trajectories. The analysis uses state-the-art empirical approaches to analyze the credit reports of approximately 2 million individuals from 2004 to 2020. They find that credit defaults can have effects persisting up to ten years. They observe significant negative impacts such as reduced credit availability, lower credit scores, decreased income, diminished home ownership, and a tendency to move to economically less active areas. The study also underscores some heterogeneity in the effects, which are larger in the defaulted amounts and if the soft defaults are then followed by more severe defaults. The implications of their work are pertinent for the development of effective policies, as understanding the costs of soft defaults at the individual level is crucial for designing appropriate debt relief policies.

ABSTRACT

 Soft default, defined as a delinquency of 90 days or more, is a relatively common event in the credit market, in 2010 such episodes affected about 3 million individuals. Yet we lack a detailed understanding of what happens afterward. We use credit report data, on approximately 2 million individuals from 2004 to 2020, to shed light on individual trajectories after such event, and document enduring negative impacts. These effects persist for up to ten years post-event and manifest in lower credit scores, reduced total credit limits, lower homeownership rates, lower income, and relocation to less economically active zip codes. It appears that those who are overextended in their mortgage lines, and with larger delinquent amounts, suffer the harshest consequences.

Access the study: Life after (soft) default

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