Troubled Debt: Take Care of Your Mental Health

Troubled debt increases mental health problems, concluded an analysis released by the Netherlands Bureau for Economic Policy Analysis (CPB).

The CPB is an independent research institute that provides policy-relevant economic analysis and projections.

The CPB also conducts research on the Dutch economy in particular and on socio-economic policy in general.

It is often suggested that troublesome debt precedes health problems. So the analysis focused on the question of whether people who get this type of debt are more likely to use mental health care or social counseling and/or financial aid, and whether they have higher costs of mental health.

The CPB uses panel data at the individual level at the national level of the Netherlands for the years 2011-2015.

It also employs a difference-in-difference approach with individual fixed effects, and we found that getting into troubled debt is strongly associated with poor mental health.

Troubled debt

The CPB found that median spending on mental health increased by about € 200 in 2014 and 2015 for people who experienced debt of this degree in 2013.

The effect corresponds to a 30% increase in individual mental health expenditures due to troubled debt.

Additionally, use of mental health increased by 7% and use of social counseling and/or financial assistance increased by 40% after incurring troubled debt.

Therefore, it concluded that policies that prevent people from getting into debt can generate positive external effects by saving on health or social orientation expenses and/or financial assistance.

Context

In many countries, troubled family debts have increased in recent years.

For example, orders against borrowers failing to repay their debts (so-called national court judgments) increased by more than 110% between 2013 and 2018 in the UK, and arrears in utilities, mortgages or rents, and purchase in installments increased between 2014 and 2018 in Belgium and Denmark (among others).

The economic crisis resulting from the Covid-19 pandemic is now expected to further accelerate the rise in troubled debts.

For example, due to the pandemic crisis, the number of indebted Dutch households is expected to increase by almost 1 million in the short term and 41% of these new debts are expected not to be resolved without the help of others.

Being in debt not only has consequences for the debtor, but also for creditors and employers due to loss of productivity and illness.

For policymakers, creditors, and employers interested in preventing household debt, it is important to understand the relationship between problem debt and other factors.