The path to bankruptcy: Debtor behavior and dependence on the annual percentage rate of charge

The aim of the study is to analyze how the level of the annual percentage rate (APR) influences the behavior of indebted people and to identify the wider implications and mutual relationships in a person's continuous spiral into debt resulting in filing for personal bankruptcy. A sample of 148 natural persons whose personal bankruptcy had been approved, was used to trace the paths to bankruptcy. Research was divided into three main areas: bankruptcy from the debtor side, degree of creditors' real satisfaction in relation to the degree predicted during the personal bankruptcy approval. The key area of research was to investigate the dependence of debtors' falling into debt on the time prior to filing for bankruptcy. The research was preceded by a pilot study which hypothesized the existence of a constant value of the annual loan cost and further conclusions which, however, were limited by the small sample size. Thus the research was extended to 843 loans. Publicly accessible insolvency registry data were used together with information from documents sent by the creditors when they were registering their receivables in individual insolvency proceedings. Having investigated the dependence of debtors' falling into the debt on the time prior to filing for bankruptcy we showed that the amount of loans with a high APR increased with as the time before filing for bankruptcy shortened. The research did not prove dependence of the amount of the loan on time. The next stage of the research investigated the relationship between the annual percentage rate and the amount of the loan provided by the creditors. The pilot study hypothesis regarding a constant value of the annual percentage rate of the loan was partially proved. CZK 21,000 was the amount that debtors were ready to settle for their credits annually. The research resulted in improved specification of the linear approximation of the APR amount dependent on the amount of the debt on a logarithmic scale. It validated the findings of the pilot study on debtors' tendency to realize more expensive loans with the approaching moment of filing for bankruptcy.