A colleague recently forwarded me a link to a recent Urban Institute study, “Delinquent Debt in America,” where a random sample of US credit data revealed that approximately 35% of adults “have debt in collections reported in their credit files,” with an average debt of over $5,000. The study focused on non-mortgage debt, including medical debt, utility bills, membership fees and phone bills.
That 35% figure, however, really stood out. More than 1 in 3 Americans have been or are being collected on (and in some cases, they may not even know it). Keep in mind that the study excluded adult Americans without a credit file (roughly 22 million), many of whom are likely to already have financial issues. So, in reality, the number is ostensibly higher.
Somewhat less surprising were the study results segmenting debt by geographic location. Areas that exceeded the norm are still struggling to recover from the financial crisis – particularly Nevada, which had a staggering 47% with debt in collections. Regions with fewer instances of overdue debt were characterized by factors such as less spending and more job availability.
What does all this mean for the US debt management industry? Well, first, let’s consider that the 35% statistic is actually marginally lower than the 36.5% figure from a Federal Reserve analysis conducted a decade ago. So we can’t point to being in a period of “runaway” bad debt.
Still, the US economy today is quite different than it was during that 2004 study. As immigrants flock to low-wage jobs, manufacturing jobs are outsourced, and many office and manual jobs are lost to automation, wage rates are bound to remain stable or slip with respect to inflation. Add to this the fact that the US has one of the world’s highest corporate tax structures in the developed world, so capital investment is less likely to land in the US and drive employment. If inflation picks up – particularly in food and housing – the gap between income and living expenses could grow, making it more difficult to repay financial obligations.
The net result is a widening gap between population and employment, driving more people to government assistance programs. This growing segment will be more vulnerable to debt issues, as they may have insufficient savings to draw upon to cover medical bills and other unforeseen financial problems. Subprime and payday lending can be expected to increase, as consumers try to make ends meet.
Ultimately, a growing number of consumers are becoming financially stressed, and the banking industry has taken note. In our latest survey of U.S. and Canadian risk managers, 43% expected delinquencies to rise on all consumer loans. That sentiment is at its highest level since our Q4 2011 survey. Combine this financial pressure on consumers with a newly transformed and demanding regulatory environment, and debt collection operations will soon have their hands full.