Household debt repayment behavior has been understudied, especially empirically, despite the heightened debate on rising household debt, personal bankruptcy filings, and arrears. In this paper, we use data from the European Community Household Panel to analyze the determinants of household debt arrears. The paper’s primary aim is to understand the role of institutions in household arrears by exploiting cross-country differences and the panel nature of the data set. We start our analysis by showing that falling into arrears has important long-term consequences for employment, self-employment, home-ownership, and health. Next, we show how arrears themselves are the result of adverse events that affect a household, such as bad health or unemployment. Finally, we show that there are important cross-country differences in how households react to these adverse events. These differences can be partly explained by local financial and judicial institutions. Indicators covering contract enforcement and the degree of credit information sharing are used to capture the costs associated with default. In particular, we show that while adverse shocks are highly important, the extent to which they affect household debt repayment depends crucially on the penalty for defaulting.

Despite the lively policy debate on rising household debt, arrears and personal bankruptcy filings, there is relatively little empirical evidence on the determinants of households’ debt repayment behavior and the incidence of arrears. Even less is known about how rates of arrears compare between countries, although debt levels vary widely. The recent turmoil in the household credit market (especially among the US subprime borrowers) underscores the need to better understand when and why households fail to repay their debts, which households get into repayment difficulties, and how policies and institutions affect debt repayment, arrears, and default. Answers to these conundrums have wider importance since they also shed light on households’ ability to smooth consumption against idiosyncratic shocks. This paper aims to present some evidence from Europe on which types of households enter arrears, how these arrears differ across countries, how some of these differences are related to institutions, and how arrears affect these households in the years that follow.