How Do Consumers Fare when Dealing with Debt Collectors? Evidence from out-of-court Settlements

Approximately 14 percent of U.S. consumers experience debt collection each year. Policymakers have long worried that many of these consumers may be unaware of their rights when negotiating with debt collectors, making them vulnerable to being taken advantage of. However, there is virtually no evidence on whether these concerns are well founded. In this paper, we investigate whether consumers who negotiate directly with debt collectors agree to deals that suggest they are ill-informed. To do so, we exploit a setting where randomly assigned civil court judges have different propensities to encourage consumers and collectors to negotiate with one another before a trial. Using new data that links court records from debt collection cases with subsequent consumer credit outcomes, we find that consumers who settle causally experience higher short-term financial distress than if their case had been resolved in court. Overall, the evidence suggests that consumers fail to walk away from bad deals offered by debt collectors.