Financial Breakups: Till Debt Do Us Part

Abstract

Using a large representative sample of individual credit bureau records, we document that personal financial distress increases a married couple’s probability of divorce by 4%-8%. Foreclosures strongly affect marital dissolution, whereas Chapter 13 bankruptcies, which protect debtors from foreclosure, have the opposite effect. These effects of foreclosure and bankruptcy protection on household stability are distinct from health- or employment-related shocks. We isolate plausibly exogenous variation in the probability of foreclosure by exploiting financial assistance programs that protect homeowners after natural disasters. Our findings highlight the role of financial stability and housing security as determinants of family structures and suggest that household finances have broad social consequences.

Keywords: Financial distress; Personal distress; Household finance; Housing stability; Foreclosure; Bankruptcy protection; Natural disasters

JEL Classification: G51, D1, D12, D14, K35, R2, G33