Working Paper Series no. 404: Households Debt Restructuring: Evidence from the French Experience

Abstract

France has a long and unique experience of public intervention in household debt restructuring. When facing financial distress, households can file a case to a “households’ over-indebtedness commission” (HOC). These HOCs either grant a delay of payment or impose a partial reimbursement of the secured or unsecured debt. This paper evaluates the ex post impact of this decision on the creditors’ recovery rate, the household’s re-default rate and the net benefit of the treatment, defined as the amount recovered by the creditors minus the public cost of treatment of the file. The random allocation of the households over file managers with different pro-household friendlinesses is used to correct for endogeneity. Sixty percent of households are ordered to repay part of their debt. Over a two-year horizon, the possibility to grant a delay of payment decreases the average redefault rate and the average repayment rate respectively from 13 to 7 percentage points and from 14 to 12 percentage points. The net benefit over a small fraction of low distressed households offsets the loss observed over a large fraction of more distressed households. Our results highlight a substantial impact of the severity of the case manager.

Henri Fraisse and Philippe Frouté
October 2012

Classification JEL : D1, G2, K35.

Keywords : Bankruptcy, Household Finance, Default, Debt Restructuring, Loan modification.