An Equilibrium Model of the Timing of Bankruptcy Filings

Existing quantitative-theoretic models of bankruptcy do not make a distinction between bankruptcy and default. In reality, default occurs first and is generally – but not always (and perhaps not even typically) – followed by a bankruptcy filing months later. While we possess reasonably sophisticated models of household default, we do not possess a comparably sophisticated model about the timing of a delinquent debtor’s filing decision. The aim of this project is to take a step toward developing such a model. The utimate goal is to use the model to quantitatively account for phenomena such as “financial distress” (the period or state during which a delinquent debtor is being pursued by creditors), “informal bankruptcy” (where a delinquent debtor does not file for bankruptcy but neither does she repay or be pursued by creditors) and to understand some of the causal forces affecting the path of bankruptcy filings around the time of the most recent bankrupcty reform as well as secular trends in bankruptcy filings.