Panel Paper: Delinquent Debt Decisions and Their Consequences Over Time

Friday, November 9, 2018
8228 - Lobby Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Breno Braga, Signe-Mary McKernan and Hannah Hassani, Urban Institute

Americans struggling financially often must decide to forgo some of their financial obligations to make ends meet. Families may know that their housing and car are at risk when they do not pay their loans. Their credit health is at risk too. Having poor credit health (for example a subprime credit score) can increase the costs of asset building by thousands of dollars. Which bills do people stop paying first when in financial distress and what are the consequences of these decisions? We find that, when in financial distress, people pay auto loans first and student loans last. While mortgage default was common during the Great Recession, mortgage delinquency rates have declined in recent years. Consumers who pay at least one debt have much better credit health three years later than consumers who pay no debts, and consumers who prioritize their credit card debt have slightly better credit health three years later.