Even if information about financial distress is “frequent,” given the million-and-a-half annual consumer bankruptcy filings in recent years in the U.S., mere frequency most likely confirms to consumers that effortless relief is available for the taking.  Frequency without salience seems to reduce availability, as when consumers under-estimate the impact of smoking, failing to exercise, or engaging in similar incrementally harmful activities.   Indeed, if the information available to consumers is that the system represents an easy way out of debt, that may well exacerbate consumers’ tendency to discount the potential future costs of risky credit behavior.  After all, if future discharge is free for the taking, why worry about the risks of present borrowing?

B.  Emerging European Systems and Extended Payment Plans

The emerging European consumer debt relief systems seem to proceed in a way that behavioral economics suggests offers much more potential to impact consumer behavior.  Each of these new systems begins much as the U.S. system does, with a petition and schedules describing in great detail the consumer’s situation of financial collapse.  The new European systems proceed in slightly different ways from that starting point, but unlike the U.S. system, they all eventually demand that the great majority of debtors make at least an attempt at repayment of debt from several years of future income.   As it turns out, in many cases, the debtor does not actually give up any future income, or gives up only a small portion of it,  but every case requires that the debtor at least submit to a plan for payment of all future income beyond a threshhold maximum amount.

The emerging European payment-system approach has greater potential salutary effects on consumers’ credit risk assessments, at least at the margins.  Requiring a payment plan in every case makes the costs of overindebtedness more salient in every case—at least a little, and perhaps significantly.  Indeed, when cases extend over several years (through the payment plan period), that also increases the likelihood that debtors and non-debtors will have readily “available” exposure to a recent example of the risks and costs of overborrowing.  The mental impact of a 90-day in-and-out U.S. case is fleeting even on the debtor, but it is much less likely that any given third party will encounter an open case during this short period.  The “debiasing” effect of multi-year payment periods may be slight, and it may ultimately not be worth the administrative cost.   But these European systems seem at least tacitly to be addressing the biases that lead to overindebtedness—both among debtors and among third-party observers.

The European-style payment-plan systems leverage the most powerful form of learning available, maximizing educational potential, even if that potential is never realized.  Indeed, the Europeans seem to have focused more on the educational aspect of this process—rather than on the economic return to creditors—from the beginning.   At least for the debtors, these systems require hands-on, active learning  about the consequences, the costs, and the responsibilities of over-borrowing.  Submitting to several years of lost revenue (or at least the potential for lost revenue) will much more likely stick in the mind of a consumer reintroduced into the open credit economy.  This is debtor education in a very meaningful sense.  Moreover, this active learning might leverage the passive learning represented by credit counseling, particularly if that counseling focuses in part on alerting debtors to the behavioral biases that may have lured them into trouble.  Ultimately, payment-plan systems send more constructive messages to potential consumer debtors about the costs and responsibilities of credit.