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Debtor Path to Bankruptcy: Dependence on the Annual Percentage Rate Charge.

This research is focused on debtor behavior and the relationship between debt expenses and insolvency. Significant changes in insolvency occurred in the Czech Republic in 2008, when a new insolvency law was enacted. The new law introduced a personal bankruptcy institute that allows for a portion of an individual's debt to be forgiven if certain conditions stated by the law are met. The primary condition is the borrower's ability to repay at least 30% of unsecured claims over a five-year period. The Debt Relief Institute has been met with great interest since its inception. Discussions are currently underway to lessen the requirements for successful completion of the process, as there are many borrowers who are unable to meet the 30% criteria.

The subjects of this research are the debtors, specifically individuals who undergo a personal bankruptcy, which is a bankruptcy settlement method implemented into Czech legislation by the Insolvency Act (Act No. 182/2006 Coll. on Insolvency and its Resolution) on 1 January 2008. The survey examined the behavior of the debtor, both the type and quantity of their debt prior to applying for relief. The costs associated with the loan were also analyzed. An attempt was made to define the loan's total cost limit, beyond which personal bankruptcy could be expected to occur.

This data source was a publicly accessible insolvency register as well as information from documents submitted by creditors when filing their claims in individual insolvency proceedings. A total of 148 insolvency proceedings of individuals whose personal bankruptcy plan was approved were investigated, which represents 843 loans. For the insolvency proceedings under examination, all receivables filed in the proceedings were analyzed in detail. These receivables consisted of loan principals and ancillaries to the principal amount. The research analyzed both the loan size (in relation to the time remaining until personal bankruptcy was declared) and the relationship between the annual percentage rate (APR) and the size of the loan provided to the debtor. The hypothesis of rising loan interest rates prior to declaration of bankruptcy was tested.

The hypothesis that the APR increases prior to the debtor declaring bankruptcy was confirmed by examining the dependency level when entering debt and before bankruptcy was declared. The verified hypothesis corresponds to the common interpretation of the path to the debt trap: the borrower first borrows from banks and institutions with a common (or relatively low) interest rate. Typically, these are places where homes, vehicles, or similar consumer goods are financed. Accumulation of other loans or problems repaying the debt will lead the borrower to non-bank lenders, whose loans are already subject to higher interest rates. Eventually, bankruptcy is declared.

In the final research phase, the relationship between the APR and the size of the loan granted to the debtor was examined. By examining the APR's dependence on loan size, it is possible to determine how much people are willing to pay for the loans they receive. The research led to a logarithmic specification of the linear approximation of the APR on debt and partially confirmed the hypothesis of the constant value of the annual loan cost (Fiserova and Pasekova, International Advances in Economic Research, 2016). This cost was estimated at CZK 21,000, which is the amount borrowers are willing to pay for their loans each year. Considering the average net income, the amount of CZK 21,000 is 1.5 times the average monthly net income of the monitored borrowers.

The research findings are particularly relevant concerning the debate on the relaxation of conditions for filing a debt relief claim in the Czech Republic, as the research analyzes the debtor's behavior in the personal bankruptcy pre-announcement period. Confirmation of the hypothesis of the debtors' tendency to incur more expensive loans when bankruptcy declaration is imminent can be significant for both creditors and drafters of the amended act. The authors intend to further analyze debtor behavior in greater detail, including assessment of the impact of future legislative changes in addressing the debts of individuals.

Acknowledgements The paper is processed as one of the outputs of the research project "Insolvency of individuals in the Czech Republic - economic and non-economic social impacts" registered at Internal FPH Grant Agency of University of Economics. Prague under the registration No. IG309037.

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[??] Jan Kubalek

Jan kulcilck (1*) [iD] Zuzana Fiserova (2*) Marie Pasekova (2)

(1) Faculty of Business Administration, Department of Strategy, University of Economics in Prague, nam W. Churchilla 4. 130 67 Prague 3, Czech Republic

(2) Fakulta managements a ekonomiky. Ustav financi a licetnictvi, Univerzita Tomase Bati ve Zline, Mostni 5139. 760 01 Zlin, Czech Republic
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Title Annotation:RESEARCH NOTE
Comment:Debtor Path to Bankruptcy: Dependence on the Annual Percentage Rate Charge.(RESEARCH NOTE)
Author:Kulcilck, Jan; Fiserova, Zuzana; Pasekova, Marie
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EXCZ
Date:May 1, 2019
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