Research, regulation, industry reports

Study leads to false conclusions about US debt

Fred Williams

The news was a shock: 35 percent of adults have a debt in collection on their credit report, with an average of $5,178 owed.

If those numbers sound too high, it’s because they are. Debt is a big problem for many people, but a third of the country does not have a wolf at the door.

The figures are based on a study, released Tuesday, of 7 million TransUnion credit reports, performed by the Urban Institute and the research arm of Encore Capital Group, a major debt buyer.

Many headlines about the report said that a third of Americans have debt in collections, but that misses an important detail: Not all Americans have a credit report. The study estimated that 77 million people have debt in collections, which amounts to 28 percent of U.S. adults, based on Census figures. That is closer to a quarter than a third.

Second, the median debt in collection, or the midpoint, was $1,349, meaning half of debts in collection are below that amount.So the average debt in collection, at $5,178 is not typical. It is being skewed upward by relatively few, larger debts.The study found debts in collection from $25 to more than $125,000.

“A lot of people have very small debts that they owe,” said Keith Leggett, senior economist with the American Bankers Association. Years ago, Leggett had a parking ticket wind up in collections, he said, because the check he mailed did not get processed within the 14-day time limit. “They turned me over to a debt collector.”

Debts in collections cover a broad financial territory including cable, utility and medical bills as well as unpaid loans and credit cards. Home mortgage payments, however, are rarely referred to collectors.

Perhaps most importantly, credit reports can overstate the amount of debt in collections for millions of people, due to stale and double-counted data.

The Urban Institute/Encore Capital study, “Delinquent Debt in America,” said its 35 percent figure was close to the 36.5 percent that Federal Reserve researchers found in 2004 when they looked at debt in collections. But that 2004 study noted what this one didn’t: There are substantial problems with how debts in collection are reported that inflate the amount of debt supposedly in the hands of collectors.

“Evidence suggests that collection agencies handle claims in an inconsistent manner,” the Fed researchers wrote in the 2004 study, “Credit Report Accuracy and Access to Credit.” Fed researcher Robert B. Avery and colleagues found that collectors often enter a new line on your credit report when a debt is paid or transferred. That makes it difficult to see the link between the new entry and the original debt, leading to double-counting of transferred debts — and failure to recognize when debts are paid off. About 5 percent of collection entries are duplications resulting from transfers and payouts, the 2004 study found.

Urban Institute researcher Caroline Ratcliffe said she was unsure whether the organization’s study was able to correct for duplicate entries.The researchers worked with figures supplied by TransUnion, she said, and paid-off debts were supposed to be filtered out. But researchers did not have access to account numbers and detailed, line-by-line reports to verify that paid debts were excluded.

In a separate analysis, the Federal Reserve Bank of New York notes another difficulty using credit reports to tally debts. When there are co-signers for a debt, such as a joint credit card, each person’s credit report will show the full amount of the debt. So when researchers tally debts in collection, co-signed debts are counted twice, inflating the total.

The New York Fed corrects for that problem, and makes other adjustments in its quarterly analysis of debts in collection. That count, for the first quarter of 2014, found that  14.3 percent of people with credit reports have a debt in collection, with an average of $1,518.

The Urban Institute/Encore Capital analysis did not adjust for the reduced liability that co-signers of a debt face.”With the data we have we can’t correct for that,” Ratcliffe said.

Why are the Fed’s figures so much smaller than the “Delinquent Debt in America” report? The biggest factor is that the Fed analysis excludes medical debts, which are rife with errors because of the complexity of medical and insurance billing. The Avery study found that about 15 percent of individuals in their sample had a medical debt on their credit report.

Medical debts in collection are disputed so often that the Consumer Financial Protection Bureau has argued that credit scores are unfairly penalizing consumers for medical debt. And FICO, the leading credit scoring company, says that it is revising its formula to give medical debt less weight.

Ratcliffe said that the “Delinquent Debt in America” study did not go into the legitimacy of debts that appear on credit reports.

Medical debt is the largest type of debt referred to collectors, said Mark Schiffman, vice president for public affairs at the collection industry group ACA International. “Hospital billing can be incredibly confusing to consumers,” he said. “You might get a bill from an anesthesiologist, a surgeon and the hospital,” some or all of which may actually be covered by insurance.

So it is an exaggeration to conclude, as many headlines about the report suggested, that one out of three U.S. consumers is in financial distress. But that’s not to say that overdue debts are not a problem.

ACA International says 1 billion unpaid accounts were sent to collection agencies in 2013, with a total value of $756 billion.The figure is based on a survey of ACA members, with their responses adjusted to arrive at an industry-wide figure. Collectors managed to recover only $55.2 billion in 2013, representing about 7 percent of the total referred to them.

Although delinquencies on consumer loans are at low levels now,  loans that went bad years ago are still weighing on consumers’ credit reports, Leggett of the bankers association said. Banks wrote off billions of dollars in credit card debt during and after the recession of 2009, for example.  Those debts remain on credit reports for seven years.  A high level of debt in collections, he said, “does not contradict the improving delinquency rates on financial products.”

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