Based on a new dataset obtained from survey data, we study household debt default behavior in Chile. Previous research in this area suggests financial and personal variables that can help estimate individual and group probabilities of default. We study mortgage and consumer default separately, as the default decisions and overall borrower behavior are different for each type of debt. Our study finds that income and income related variables are the only significant and robust variables that explain default for both types of debt. Demographic or personal variables are specific to one or the other type of debt but not to both. For example, level of education is a factor that affects mortgage default, whereas the determinants of consumer debt default include the age of the household head, and the number of people within the household that contribute to the total family income. We derive threshold probabilities of default for each type of debt and compare them to those obtained from results of previous work based on the same Chilean data, but with a different approach. We find that the probability of default decreases as the family income increases, and that our estimates are consistent with other studies similar to ours. Also consistently with previous research, we find that, in terms of the distribution of debt and default risk, the largest portion of the country’s household debt is in the hands of families in the upper quintiles, who have the lowest risk of default. This implies that the overall financial system should be relatively stable, even in the face of moderate macroeconomic shocks.

In the present paper we study the determinants of debt default at the household level in Chile. Using a dataset obtained from the Survey of Household Finances (Encuesta Financiera de Hogares, EFH, 2007), we estimate various specifications of a profit model in search of the characteristics, both personal and financial, that have the highest impact on the overall probability that a household will default on its outstanding debt. We test a range of explanatory variables that have been identified by previous theoretical and empirical studies as being influential in a person’s decision to stop debt repayments. Since the very structure of the types of debt differs and thus so do the determinants of default, we choose to analyze securitized (mortgage) and non-securitized (consumer) debt separately. We find that, for both types of debt, income is a significant and robust predictor of default risk, be it as a direct continuous variable, an indicator for income-quintile groups, or as other variables that are highly correlated with income and therefore act as proxies for it, like owning a bank account. For mortgage debt the level of education of the head of the family is a significant determinant, while for consumer debt the age and age squared of the household head are also factors. Debt service ratio is also tested as an independent variable and is found to be of importance in determining consumer debt risk only, as are various controls for the number of people who contribute to the family income.