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Natural Disasters Send More Individuals Into Collections: Report

Natural disasters can significantly impact the lives of those who are affected, but one unintended consequence that has not traditionally received a lot of attention is the impact on an individual’s credit score and financial well-being. A recently released study concludes that individuals impacted by natural disasters experience decreased credit scores, more debts that are placed with collection agencies, increased credit card debt, and more bankruptcy filings.

The report was released last week by the Urban Institute, a Washington, D.C.-based think tank.

Interestingly enough, medium-sized disasters, which are less likely to long-term attention and recovery funding, impact the credit scores of affected individuals more than large disasters. Individuals impacted by medium-sized disasters saw an average drop of 22 points in their credit score, compared with a 10-point drop for those affected by large disasters.

A year after a medium-sized disaster, 5% more individuals have a debt placed with a collection agency, and that figure doubles four years after the disaster, showing the long-term effects that recovering from a disaster can have on an individual or family.

These effects are substantial; the share with debt in collections is nearly 25% higher by year four than for comparable people not hit by a disaster. The average amount of debt in collections is $1,420 higher in year one, and this rises to $2,014 in year four. This is also a correspondingly large effect; the comparison group mean amount of debt in collections in year four is about $2,700.

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