Abstract When a macroeconomic shock arrives, variation in household balance sheet health (captured by the presence of financial distress, or “FD”) leads to differential access to credit and hence a distribution in consumption responses. As we document, though, over the past two recessions, households in prior FD also experienced macroeconomic shocks more intensely than others, leading to a distribution of shock severity. Quantifying the importance of each dimension of heterogeneity (FD or shock severity) for consumption requires a structural model. We find that heterogeneity in FD matters more for shaping the responses of individual and aggregate consumption to shocks.