A fresh start? Understanding the consequences of debt relief

Project title

A fresh start? Understanding the consequences of debt relief

Project summary

Consumer debt is at an all-time high in several countries, and in 2018 around 400 000 Swedes had demands for outstanding debt corresponding to 80 billion SEK (Kronofogden 2019). Since 1994, individuals who are unable to pay their debts can apply for debt relief at the Swedish Enforcement Authority, Kronofogden. During the last 10 years, on average 10 000 individuals have applied each year, and common reasons for being indebted include health issues, divorce, overspending, gambling problems, unemployment and business failure. 

In 2018, almost 60% of the applications were approved. In most cases, approved applicants spend the following 5 years following a strict payment plan, where they only get to keep income enough to sustain subsistence level. After this period, all remaining debt is forgiven.

Our project aims at understanding debt relief from two complementary points of view. First, we will look at the debtor's side. Specifically, we will investigate the consequences of being granted (or denied) relief on a variety of debtor's short and medium-run outcomes, such as employment and other labor market outcomes, marriage and divorce, crime, health, and children's educational achievements. While we are not the first studying the effects of debt relief, we will be able to complement and significantly expand on previous research by studying a much broader and detailed set of individual outcomes, by extending the analysis to inter-generational effects, and by considering at a longer time horizon. We are also able to look at whether individuals granted debt relief relapse, i.e. become indebted again.

A second, equally important, aspect of debt relief relates to the determinants of case workers' decisions to grant an application or not. In a preliminary dataset we obtained from Kronofogden, the case workers' approval rate ranges between 7% to 95%. Given that, in principle, the assignment of cases to case workers is random, this large variation in approval rates suggests that there are large differences in how each worker perceives each case. For instance, it is possible that some are more lenient with applicants they empathize with, because, e.g., they share the same nationality, grew up in a poor household, are both women, etc.

This aspect of debt relief measures has been covered substantially less by previous literature, which have predominantly focused on the debtor's side. Understanding case worker variation is also related to a broader question about consistency and accuracy among individual decision makers. In many cases decisions about access to social insurance is decided by individual case workers (e.g. income support, sickness benefits), with little external review.  
 

Project duration

2020-2023 

Main applicant

Luca Repetto

Co-applicant

Linna Martén 

Funder

Handelsbanken

Amount received

SEK 2,000,000

Last modified: 2021-03-09