Individual Insolvency: Consumer Credit, the Business Cycle, and a "Leniency Index"
The increase in inflation, accompanied by interest rate increases, raises the risk of individual insolvencies. The proportion of the population facing insolvency is an essential economic variable used by credit providers to price risk. Individual insolvency cases have a significant impact on economic activity, including the depth of the business cycle and labor productivity. Factors in determining whether to open an insolvency proceeding are not only the debtor's financial distress but also, and even more, legal frameworks, court procedures, and social and cultural variables associated with insolvency.
The “leniency index” that we have first developed in Israel represents the legal and social considerations that are the decision-making environment for opening insolvency procedures for individuals. Our “leniency index” shows that the enactment of a new Bankruptcy and Insolvency Law in September 2019 led to a significant improvement in debtor benefits. We found that this index had a significant impact on the proportion of applications to file for insolvency among individuals in Israel, along with the effect of financial and economic variables, particularly the consumer credit rate.
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