WASHINGTON (7/31/14)--Thirty-five percent of adults have a debt in collections reported in their credit files, an Urban Institute study shows. But while the 35% figure is definitely cause for concern, it may be more a reflection of aftereffects from the recent recession than a long-term measure of household financial health, a Credit Union National Association economist advised.
"The depth and duration of the Great Recession left many out of work and/or underemployed--and that contributed to a huge surge in defaults--reflected in ongoing collections," Mike Schenk, CUNA's interim Chief Economist told News Now. "More recently, however, unemployment has declined from a cyclical high of 10% to 6.1% today and households collectively reflect substantial improvements in their financial position. The stock market is trading near all-time highs and home prices have rebounded lifting the value of household financial assets."
The study, conducted with Encore Capital Group's Consumer Credit Research Institute, found 77 million Americans owed an average of $5,200 in September 2013.
Nevada, hit hard by the housing crisis, tops the list of states: 47% 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%: 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% of residents with reported debt in collections.
Debt in collections involves a nonmortgage bill--such as a credit card balance, child support obligation, medical or utility bill, parking ticket, or membership fee--that has been reported so far past due that the account has been closed and placed in collections, often with a third-party debt collection agency. 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.
While it's true that most households carry debt--according to the Federal Reserve 75% of families carry some form of debt--Schenk said it's also is true that debt loads have been declining: Total debt outstanding peaked at roughly 125% of disposable income at the start of the recession, but declined to 98% of take-home-pay at the end of the first quarter 2014--a level not seen since 2002.
"With improving asset values and lower debt loads household net worth has increased dramatically and now is at the highest level ever--even after adjusting for inflation," Schenk told News Now. "These improvements have translated to substantial declines in loan delinquencies and loan defaults--with both banks and credit unions now reporting levels in these measures that are near pre-recession norms."