About one in three Americans has some debt in collections, according to a new report prepared by Washington think tank the Urban Institute. That’s a number that sounds really worrying, but how big a deal is it?
While a large debt burden is never good news, it also isn’t exactly an indicator that we’re on the precipice of another financial crisis. The report, prepared in conjunction with the Consumer Credit Research Institute based on data from credit reporting company TransUnion, says that 35% of people with credit have some debt in collections. But that number hasn’t really changed much in a decade. The report notes that a 2004 analysis of credit bureau data by the Federal Reserve showed that 36.5% had debt in collection. That’s pretty stable over a decade that also happened to include the deepest economic downturn since the Great Depression.
A separate report from the Federal Reserve Bank of New York also shows that the share of consumers with debt in collections hasn’t risen considerably in recent years. The New York Fed looks at a smaller sample of the percent of people with debt held by third-party collections. That means it includes unpaid bills that are sold to collections agencies, but doesn’t count debt that is in the collections department of a big company. So an unpaid medical bill sold to a collections company is counted, while a utility bill that went to the company’s internal collections department isn’t. The Urban Institute study includes both. But the New York Fed numbers offer some sense of how the level has changed over the years.
The percent of people with debt held by collection agencies increased during the recession but has held pretty steady around 14% since 2010. Americans built up a lot of debt before the recession, and were hit hard by the downturn.
But over the past few years, things have improved markedly for debtors in the U.S. Most loan types still have more people behind on their bills than before the recession, but delinquencies are returning to normal (with the exception of student loans which still have a large share of payments past due).
A report this week by ratings firm Standard & Poor’s noted that indebtedness in the U.S. has fallen substantially since its peak in 2007. “After the run-up of debt and the ensuing Great Recession, the household sector has gone through a long–and necessary–process of deleveraging. However, signs are now indicating that this drawn-out deleveraging might be coming to an end,” S&P wrote, noting that Americans reduced their debt by a combination of borrowing less, paying down balances and defaulting on loans.
So, if Americans are making progress on their debt levels why hasn’t there been improvement in the percent in collections? A combination of issues is at work. For one, debt in collections stays on consumers’ credit reports for at least three years. So a debt that was in default in 2007 is just coming off credit reports this year. Delinquencies built up during the dog days of the recession will only start to disappear in the next few years. Meanwhile, some people might not even know they have unpaid balances.
“Consumers themselves may not realize they have debt in collections. Some consumers report becoming aware of this debt only when they review their credit report,” according to the Urban Institute report.
Meanwhile, debt collectors have significantly grown their businesses and gotten better at finding people who owe money. “Technological innovations over the past thirty years have increased exponentially creditors’ and debt collectors’ ability to obtain, store, and transfer data about consumers and their debts,” according to a 2009 Federal Trade Commission report. “In response to this new capability, many industry members use more efficient means of transferring data and store more data for longer periods of time than their predecessors.”
Debt is a burden to large numbers of Americans who took on more credit than they can handle. And as long as unemployment remains high and wages are stagnant, it will be difficult for consumers to pay their bills. But the large share of Americans with debt in collections has nearly as much to do with how debt is collected as how much is owed.