Cancer Diagnoses and Household Debt Overhang

Abstract

This paper explores the role of capital structure in determining how households respond to unanticipated shocks. We draw on a novel dataset linking individual cancer records to high-quality administrative data on personal mortgages, bankruptcies, foreclosures, and credit reports. We find that cancer diagnoses induce a substantial increase in various measures of financial stress regardless of whether the patient carries health insurance. Foreclosure rates, for example, increase 65 percent during the five years following diagnosis. The effect, however, is concentrated among patients with low levels of housing equity. Highly leveraged households default, undergo foreclosure, or file for bankruptcy; less-levered households cope with health shocks by drawing on home equity and other sources of liquidity. These results point to the critical role of capital structure in determining how households respond to severe shocks. They also suggest that household leverage may merit as much policy attention as health insurance.