The Persistence of Financial Distress, No. 19-03

Household financial distress is pervasive. Is this pattern driven by a small share of individuals experiencing persistent distress, by the majority facing more occasional distress, or something in between? Recent research indicates that over a lifetime, financial distress is unlikely for most but very persistent for some. Models that account for the uncertain evolution of consumers' earnings over time and the availability of formal consumer bankruptcy cannot explain—by themselves—this pattern, but a model that also allows for informal default and variation in consumers' willingness to sacrifice future wealth for current spending can.