With 35 percent of the US population in debt collection, the time has come to call this a crisis.
Americans are in debt—deep, deep debt—still clearly feeling the effects of the Great Recession, and they’re paying for it or in this case not paying for it.
Some 35 percent of adults or 77 million Americans have a debt in collections and owe just more than $5,000 each, according to a study conducted by the Urban Institute and Encore Capital Group’s Consumer Credit Research Institute.
In many cases for older Americans, it’s unpaid medical bills that has gone to debt collectors. And there are dangers that the problem could get worse, although experts say people can take steps to avoid debt collections, especially when it comes to unpaid medical bills.
Some 10 million adults or 5.3 percent of people are at least 30 days late on a credit card, auto loan, student loan or other nonmortgage payment. The average amount needed to pay to become current on that debt is $2,258, the study says.
A related study by the Urban Institute shows that the average total debt in America stands at $53,850, according to the most recent numbers from the fall 2013 in analyzing people with credit files. The debt stood at $209,768 for those with mortgages and $11,592 for those without mortgages.
The latest numbers aren’t showing that collections are getting worse, but it’s a reflection that as we move further away from the Great Recession, that people’s financial households aren’t necessarily improving. Studies show the level of people in collections has remained constant even though credit card debt is down over the past decade-plus.
“Most people wouldn’t blink if told that the majority of Americans carry some debt. But they would be shocked to learn that reported debt in collections is pervasive and threads through nearly all communities,” says Caroline Ratcliffe, a senior fellow at the Urban Institute. “Delinquent debt can harm credit scores, which can tip employers’ hiring decisions, restrict access to mortgages and even increase insurance costs.”
This debt can remain in a person’s credit file for seven years. Some consumers become aware of collections debt only when they review their credit report, Ratcliffe says.
What’s going unpaid and reported to collections is a variety pack besides medical bills. It includes credit cards, child support, utility payments, parking tickets and even health club membership fees.
The Urban Institute study doesn’t break down the debt collections by age groups, but older Americans appear to be vulnerable based on other reports. The Minneapolis-based Association of Credit and Collection Professionals says nearly 38 percent of debts collected are healthcare bills. Student loan debt accounted by 25 percent and credit card was 10 percent, says association spokesman Mark Schiffman.
“The data we have seen shows that people are holding less credit cards, and a lot of that got cleared up during the recession,” Schiffman says. “But the healthcare stuff stays with you. It’s a bigger number and harder to pay off.”
Schiffman says the association’s research of collection agencies shows there were one billion accounts that went into collection in 2013. The face value of the debt was $756 billion. Of that, collection agencies recovered $55.2 billion.
“That’s 7 percent of the debt that’s out there. That’s a staggering number,” Schiffman says.
There are options to avoid being one of the 35 percent that goes to collections, Schiffman says. The creditor won’t turn it over to a debt collector if you’re on a payment plan. If you don’t communicate, they assume you’re going to default and they’re looking at how they do get paid. They don’t know that someone had a medical mishap or a health crisis where they can’t pay their bills, Schiffman says.
“If you have a financial hardship, the hospital or the state might have a financial plan to help reduce the burden,” Schiffman says. “The IRS has regulations for nonprofit hospitals that say you have to offer patients access to financial assistance programs. Consumers would never know that on their own, so if you’re not communicating and you financial hardship, that’s an opportunity to find out what might be available to you. Would a hospital be willing to take a payment plan that works? Many are. They want to get paid, but we can’t get there until we’ve had conservation. That’s where it all starts.”
Once you stop communicating, everything else becomes less than friendly, and it doesn’t make it go away, Schiffman says. Once the statute of limitations runs out on suing people in a particular state, creditors are still willing to report it on the credit.
“The mistake people most often is they refuse to communicate and they assume wrongly that if you don’t answer the phone and tell you not to contact me, the debt will go away,” Schiffman says. “That’s not the case. We don’t have a system in America like that. It doesn’t go away. It follows you. You’re leaving them little recourse. One is a credit report. Two, if they deem it necessary, they can try to attempt to sue to garnish wages.”
The most comprehensive breakdown of the Urban Institute study is one of states.
Nevada, which was hit hard by the housing crisis, tops the list of states: 47 percent of people with a credit file have reported debt in collections. The state also has the highest average collections debt, $7,198.
Twelve other states (11 in the South) and the District of Columbia top 40 percent: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Texas and West Virginia.
On the low end, the Midwest’s Minnesota, North Dakota and South Dakota have about 20 percent of residents with reported debt in collections.
Of the 100 largest metropolitan areas, five have at least 45 percent of people with collections debt: McAllen, TX (51.7 percent); Las Vegas (49.2 percent); Lakeland, FL (47.3 percent); Columbia, SC (45.2 percent); and Jacksonville, FL (45.0 percent).
Only six metro areas, none in the South, have less than a quarter of people with collections debt: Minneapolis/St. Paul (20.1 percent); Honolulu (21.0 percent); Boston (22.4 percent); Madison, WI (22.6 percent); San Jose, CA (23.0 percent); and Bridgeport, CT (24.5 percent).