In studying the “fresh start” provisions of personal bankruptcy law, economists typicallyfocus on the
of debts. However, another important feature is the
of past defaults. In many countries, lenders are not permitted to use information about pastdefaults after a speciﬁed period of time has elapsed.In the United States, the Fair Credit Reporting Act (FCRA) prescribes that a personalbankruptcy ﬁling may be reported by credit bureaus for up to 10 years, after which it must beremoved from the records made available to lenders.
Similar provisions exist in most othercountries. In Figure 1 we summarize the distribution of credit bureau regulations governingthe time period of information transmission across countries.
Of the 113 countries withcredit bureaus as of January 2007, over 90 percent of them had provisions for restricting thereporting of adverse information after a certain period of time.
Diﬀerences in information-sharing regimes across countries — whether a credit-reportingsystem exists, and whether there are time limits on reporting past defaults — are associatedwith diﬀerences in the provision of credit. In Figure 1 we also graph the average ratioof private credit to GDP according to whether the country restricts the time period of information sharing. It is interesting to note that countries in which defaults are alwaysreported tend to have
provision of credit than those countries in which defaults arenot reported (“erased”) after a certain period of time.
Musto (2004) studies the eﬀect on lenders and individual borrowers of restrictions on thereporting of past defaults, using U.S. data. He shows that (i) these restrictions are binding— access to credit increases signiﬁcantly when the bankruptcy “ﬂag” is dropped from creditﬁles;
and (ii) these individuals who subsequently obtain new credit are subsequently likelierto default than those with similar credit scores.In this paper we analyze these restrictions in the framework of a model of repeatedborrowing and lending, and determine conditions under which they are welfare improving.
Other derogatory information can be reported for a maximum of seven years; see Hunt (2006) for adiscussion of the history and regulation of consumer credit bureaus in the United States. This time periodis often even shorter in other countries; Jappelli and Pagano (2004) report several speciﬁc examples.
Source: Doing Business Database, World Bank, 2008. Throughout, we use the term “credit bureau” torefer to both private credit bureaus and public credit registries.
See also Jappelli and Pagano (2006).
Private credit/GDP is constructed from the IMF International Financial Statistics for year-end 2006. Asin Djankov, McLiesh, and Shleifer (2007), private credit is given by lines 22d and 42d (claims on the privatesector by commercial banks and other ﬁnancial institutions). The credit bureau regulations are current asof January 2007 (source: Doing Business Database 2008).
That is, after 10 years.