Once in financial trouble, usually in financial trouble.
That is likely the case for most households, according to data released by researchers at the Federal Reserve Bank of St. Louis. In looking at instances where an individual has filed for bankruptcy protection in the past five years, the researchers found that those people are about twice as likely as the average individual to be in financial distress today.
In looking at individuals who have filed for bankruptcy protection, and then looked at the share of households who, five years later, were behind on a loan payment. By correlating that data, the researchers found that households that have encountered an episode of financial distress in the past are 1.5 times more likely to delay payment today, compared to average households.
Our focus on the persistence of financial distress arises because it is the latter that provides essential guidance to the appropriate interpretation of the risks of encountering distress over one’s lifetime. For example, if financial distress is highly transitory, a given incidence for it over the life cycle would suggest that most or all households face similar risks over their lives. If, on the other hand, financial distress is highly persistent, the same incidence would be disproportionately accounted for by a much smaller number of borrowers who repeatedly, or in a sustained fashion, encounter distress.