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Many families live on the financial edge, but a natural disaster can throw even better-situated families into financial turmoil. A natural disaster can lead to increased debt and delinquencies—increasing financial stress in the near term, but also longer-term declines in financial health. This study builds evidence on how natural disasters impact residents’ financial health. Our analyses compare the financial outcomes of residents in areas hit by natural disasters to otherwise similar people in communities not affected by natural disasters.

Four general themes emerge from our analyses:

• Disasters lead to broad, and often substantial, negative impacts on financial health. We find evidence of negative impacts across most measures of financial health, including credit scores, debt in collections, bankruptcy, credit card debt, and mortgage delinquency and foreclosures.
• The negative effects of disasters persist, or even grow over time, for important financial outcomes. While living in a community hit by a medium-sized natural disaster leads to a 5 percentage point increase in the share with debt in collections one year after the disaster, this negative effect doubles to 10 percentage points by year four.
• Medium-sized disasters, which are less likely to receive long-term public recovery funding, lead to larger negative effects on financial health than large disasters. We find more substantial credit-score declines among residents hit by medium-sized disasters (22-point decline) than large disasters (10-point decline).
• Individuals and communities more likely to be struggling financially before disasters strike are often the hardest hit by the disaster. People living in communities of color hit by medium-sized disasters experienced an average 31-point credit score decline, compared with a 4-point decline for people in majority-white communities.

These results suggest that, in general, existing disaster relief programs and other forms of assistance, along with private sources of insurance and support, do not fully protect those affected by natural disasters from their financial consequences. The pattern of results is also broadly suggestive that disasters may be not only harmful for affected residents on average, but may also have the effect of widening already existing inequalities.

Our findings provide insight into strategies to promote resilience and recovery for multiple actors—government leaders (local, state, federal), philanthropists, nonprofit leaders focused on financial health, and regulators. For example, our main findings suggest post-disaster programs and resources should consider long-term financial needs, in addition to more immediate needs. Also, a larger share of recovery resources should be aimed at communities struggling before the disaster hit. These and other recommended strategies are discussed in more detail in the report.