The Financial and Psychological Relief of Insolvency

Economics; Mental Health

We hope to provide debtors with low-cost insolvency options and assess how the price of these options relates to mental health and well-being around financial security.

Research Interests
  • Bankruptcy
  • Cognitive Science
  • household finance

'Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery. ' - Charles Dickens, David Copperfield

Globally, national governments and prominent organizations including the International Monetary Fund and the World Bank have identified the hurdles to accessing bankruptcy as a pressing policy problem in need of a response. The hefty price of approximately $2,000 for bankruptcy filing and $6,300 for a consumer proposal in Canada (comparable to the price in the US) limits access to debt relief and excludes economically vulnerable individuals from achieving a fresh financial start. Our project will randomize the price of bankruptcy filings and consumer proposals provided to each participant, lowering the average cost of each by as much as 84 percent. This will allow us to determine two key facts: 1) how sensitive prospective insolvency filers are to the cost of services and 2) how these costs are related to an individual’s post-insolvency credit and mental health outcomes. This grant application focuses in particular of the impact of debt relief cost, and debt relief more generally on the mental health of debtors.

There has been extensive literature connecting income and/or wealth and happiness. The most famous example of which is Brickman et al. (1978) which suggested that lottery winnings did not meaningfully impact long-term happiness. Oswald and Winkelmann (2019) update this research with new comprehensive data to show that indeed winning the lottery does make people happier, potentially because it helps people avoid financial stress. However, there is a relative paucity of literature on the effect of financial stress and its impact on mental well-being. Netermeyer et al. (2017) show that financial well-being has a comparable effect on overall well-being as the combined effects of job satisfaction, physical health assessment, and relationship support satisfaction. Relatedly, a variety of research (Kaufman et al., 2020; Dow et al., 2019; Gertner et al., 2019) has shown a link between increasing or more generous minimum wage rates and reduction in suicide rates. We hope to provide the first causal research of reducing/eliminating financial stress and its impact on well-being.

We anticipate evaluating mental well-being in three ways: clinical conditions, life satisfaction scales, and experienced well-being. Clinical conditions include sub-clinical measures of conditions such as depression and anxiety to determine the effect of financial well-being on mental health disorders. More broadly, life satisfaction scales include subjective assessments of overall life satisfaction. Lastly, experienced well-being involves thought sampling participants at multiple times over a longer temporal horizon and asking how they feel at a variety of moments. The diversity of these measures will help form a comprehensive picture of what aspects of the removal of financial stress specifically contribute to well-being.

There is emotional and social stigma associated with bankruptcy, along with financial stigma that manifests itself through decreased credit scores, higher interest loans, and future difficulties in obtaining credit (Buckley & Brinig, 1998). Fear of this stigma in addition to the hefty cost of bankruptcy can delay an insolvent person from filing for bankruptcy, even with the severe competing consequences of high debt (Chin, Cohen & Lindblad, 2019). We will ask questions about both filers and prospective filers’ mental well-being both at the time of filing and in follow-up surveys. We hope to provide some of the first estimates of the effects of bankruptcy on mental welfare to help reduce stigma as a reason for why borrowers do not file for insolvency.

Project Status Details

Our proposed study will be set up as a randomized control trial. We plan to recruit participants that may be interested in either filing for bankruptcy or a proposal through targeted Google advertisements that have already been developed, awarded ethics approval, and modeled on advertisements for similar services by real businesses. Once prospective participants click on a Google advertisement associated with our study, they will reach our project’s website where they must complete an electronic informed consent form to participate. For those that choose to proceed, they will be asked to complete an online financial questionnaire to provide general information about themselves (including their SIN) and their financials. This online questionnaire will collect the information that is typically collected in the OSB’s Forms 65 and 79 that document information about one’s income, expenses, assets and liabilities. In addition to inputting their financial information, participants will also be asked to respond to personal questions with an aim to understand the toll that their debt is taking on them and their experiences to date in seeking out financial services. Our software developer has already implemented a robust data collection protocol to faciliate safe and secure data collection and to prevent against the risk of security breaches, which has also received ethics approval.

Using this financial screening information from the online questionnaire, we can determine if prospective candidates meet the eligibility criteria for no and low- income and no asset debtors who are looking to use the services of a Licensed Insolvency Trustee (LIT). Participants who meet the eligibility criteria will be offered the opportunity to proceed in booking a virtual meeting or phone appointment with our study’s designated LIT. After meeting with the LIT to receive more information about their options, participants will have the opportunity to file for bankruptcy or alternatively to file a proposal based on their own individual preference. Participants will be asked to complete and sign an agreement to verify their selected debt relief option and arrangement with the LIT. We will track the participants for 5 years by relying on their credit bureau data associated with their SIN. This matching process has also received ethics approval and will be done securely in collaboration with a major Canadian credit bureau. 

The online filing tool is available at debtreliefproject.ca, ethics approval has been granted, and the LIT has experience using the tool. Our next stage is to launch a pilot of our randomized control trial by March 2021. This will allow us to test our custom-designed online questionnaire tool in the field before launching the full trial. We hope to recruit between 200 and 300 participants in this trial to estimate preliminary effects to conduct power calculations to determine the optimal number of participants to recruit in our full study. The funds we are seeking from SSHRC  will secure the advertising money we need to implement the pilot and full randomized control trial, purchase the credit bureau data we require to assess financial outcomes, and allow us to conduct follow-up surveys to ask about non-financial outcomes. 

We believe a considerable funding advantage of our project is the collaboration we have established with an existing LIT. The LIT has agreed to process filings and proposals for our participants at cost instead of their regular fee. This works out to a donation in-kind of their labour of as much as $175,000 (depending on the number of participants and insolvency option selected by each participant). There is emotional and social stigma associated with bankruptcy, along with financial stigma that manifests itself through decreased credit scores, higher interest loans, and future difficulties in obtaining credit (Buckley & Brinig, 1998). Fear of this stigma in addition to the hefty cost of bankruptcy can delay an insolvent person from filing for bankruptcy, even with the severe competing consequences of high debt (Chin, Cohen & Lindblad, 2019). We will ask questions about both filers and prospective filers’ mental well-being both at the time of filing and in follow-up surveys. We hope to provide some of the first estimates of the effects of bankruptcy on mental welfare to help reduce stigma as a reason for why borrowers do not file for insolvency.

[link between mental health and financial security]

Desired outcomes

We anticipate three papers to come out of this project. The first will be an estimation of an elasticity of demand for bankruptcy/proposal services. Namely, when the price of filing for either bankruptcy or proposal decreases, what is the percentage increase in the number of people that will file for bankruptcy. This estimation will allow us to estimate welfare impacts of changing the financial cost of access to bankruptcy.

The second paper will include the long-term effects of the cost of filing on financial well-being. Here, we will merge the time panel of credit bureau information about our filers to determine whether they have improved access to credit, more accounts, and better credit scores among other outcomes as a result of the lower fees paid for insolvency.

The third paper, and the primary focus of this proposal, is an assessment of the impact of financial stress on mental health and well-being. 

More broadly, we hope the combination of these estimates will allow us to improve accessibility to low-cost debt relief services and encourage implementing lower cost debt relief options worldwide. In the course of preparing these papers for publications, we plan to present our findings at conferences and share our results with policy makers.