Triggers and determinants of severe household indebtedness in Germany

Abstract

The phenomenon of overindebted private households has created economic and political concern, also in Germany. Using measures of relative (over-) indebtedness which relate household income and debt services to different concepts of subsistence level, this paper investigates the question whether severe household indebtedness is mainly driven by trigger events such as unemployment, childbirth, divorce, or death of a household member expenditure or whether household characteristics are the prevailing determinants. Exploring the panel structure of the German Socio-Economic Panel (GSOEP), the results suggest that a further child is likely to cause severe household indebtedness. Unemployment also worsens the relative debt situation, mainly due to the income drop. Strokes of fate and events such as wedding and cohabitation do not have a direct effect on the risk of overindebtedness. However, if these events come along with a change of the number of adult household members, the associated income shock may trigger severe indebtedness, too.