The Persistence of Financial Distress

November 29, 2017
By Kartik Athreya, Jose Mustre-del-Rio and Juan M. Sanchez


Research Working PaperWhile many US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.

Using proprietary panel data, we show that many US consumers experience financial distress (35% when distress is defined by having debt in severe delinquency, e.g.) at some point in their lives. However, most distress events are concentrated among a much smaller proportion of consumers in persistent trouble: fewer than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of unsecured debt with informal default that accommodates a simple form of heterogeneity in time preference.

Download paper, RWP 17-15, November 2017; Revised September 2018

JEL Classification: D60, E21, E44

Article Citation

  • Arthreya, Kartik, José Mustre-del-Río, and Juan M. Sánchez. 2017. “The Persistence of Financial Distress.” Federal Reserve Bank of Kansas City, Research Working Paper no. 17-15, November. Available at https://doi.org/10.18651/RWP2017-15

Related Research

  • Athreya, K., J. M. Sánchez, X. S. Tam and E. R. Young, "Bankruptcy and Delinquency in a Model of Unsecured Debt," Technical Report, Federal Reserve Bank of St. Louis, 2017, forthcoming International Economic Review.
  • Fulford, S. L. and S. Schuh, "Credit Card Utilization and Consumption over the Life Cycle and Business Cycle," Technical Report, Federal Reserve Bank of Boston, September 2017.
  • Livshits, I., J. MacGee and M. Tertilt, "Consumer Bankruptcy: A Fresh Start," The American Economic Review 97 (March 2007), 402–418.