Friends with Bankruptcy Protection Benefits

We evaluate whether social networks limit the effectiveness of targeted debt relief programs.  In our setting, individuals learn about the likelihood of debt relief from the recent experiences of workplace peers who file for Chapter 13 bankruptcy. While peers granted bankruptcy are able to discharge or modify debts, those peers whose filing is dismissed lose all protections. Through the random assignment of bankruptcy judges to court cases, we identify the causal effect of observing a peer’s bankruptcy outcome. We determine that individuals with a “dismissed peer” are two percent less likely to file bankruptcy and two percent less likely to enter mortgage foreclosure. Given the magnitude of our estimates, granting bankruptcy protection to a single household aggregates to additional strategic defaults and further creditor losses. Overall, our results isolate a primary channel relating social networks and household finances: updating expectations of debt relief.