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 experiences of workplace peers filing bankruptcy. Peers granted bankruptcy can discharge debts, while peers facing dismissal lose all protections. Exploiting the random assignment of bankruptcy judges, we determine that individuals with a “dismissed peer” are significantly less likely to file bankruptcy and enter foreclosure. Our results highlight a novel channel relating social networks to household finances and demonstrate substantial spillover costs from granting debt relief.