Collections Lurk in America’s Credit Jungle

March 19th, 2015 | admin | Tags: , , , ,

Danger lurks in what has become America’s credit jungle.  While the danger is an issue for all, it can be a huge concern for employers and landlords.  Here’s why. More than a third of people with a credit file, 35 percent, are in collection, some 77 million people with an average collection debt of $5,178 reports the Urban Institute.  Multiply that out and the total is $398.7 billion in debt in collection.

The data at least give pause. What is important in these figures is that they show a problem with debts that can affect rental properties and companies that have tenants and employees, respectively with problem debts.  We’ll get into why as we go.

Let’s start with an easy one, car loans.  The automobile dealers seem to have continued where the mortgage lenders left off before the housing crash.  Bloomberg News reports that 27 percent, more than one in four, auto loans went to subprime borrowers in the first half of 2013, “up from 18 percent in 2009.”  A subprime borrower is defined as someone with a FICO score of under 640. But some automobile lenders are loaning money for buyers with scores in the 500s. Experian Automotive reports the subprime financing is the highest percentage since it “began tracking the data in 2007.”

Those subprime car loans are coming home to roost.  AdviceIQ reports that “car repossessions jumped 70.2% in the second quarter” of 2014.  Auto loans have hit “an all-time high of $839 billion, climbing 11.7% in the second quarter” reports Experian.  Considering that a quarter of the car loans are going to people who most likely can’t pay for them. Repossessions will continue.

The question for both rental owners and employers is, if someone has a car repossessed, how will he or she get to work?  Public transportation?  Maybe. Carpooling?  Maybe.  Not at all?  Maybe.

The most troubling figure, though, is medical debt.  Of the 77 million people who are in collection, 51 million are in collection for medical debt, that is 66 percent, two or three people.

Remember the new FICO scoring system?  It affords less emphasis on medical debt, thus increasing the FICO scores of those who have medical debt, both current and in collection.  Does that mean medical debt is less of a problem?  NO!  Just look at the statistics.

The National Patient Advocate Foundation, citing a study by the Centers for Disease Control,  reports that one in five “American families will struggle to pay a medical debt this year.”  It also reports on a study by the Millman Medical Index that the average annual cost of healthcare per family is about $22,000.

If history is a judge, one in five people with medical debt will go into collection?  A study by Bankrate found that a quarter of Americans had more medical debt than savings.  Combine that with credit card debt, car loans, and rent and mortgage payments, and that puts many people in over their heads.  Any unexpected expense means that some bill doesn’t get paid.  Six months of that bill sitting unpaid means it is turned over to a collection agency.

Alex Szeto, Public Affairs Specialist with the Association for Credit and Collection Professionals, told me that the dollar amount of medical debt collected in 2013 as $55.226 million.  That represents 37.9 percent of the total medical debt in collection.  A little simple math shows the total medical debt in collection is $145.67 million, slightly more than the entire state budget of Nevada of $141.9 billion.

The concerns for rental owners and employers are that the dangers are lurking not even behind trees and bushes in the credit jungle. They are planted squarely in plain sight on the highways, waiting to gobble up with major problems the unwary.

An unpaid debt of any kind that goes into collection can result in three things.  First, it gets paid, but fewer than 38 percent do. Second, the debtor can file bankruptcy.  In fact, the National Patient Advocate Foundation reports that 68 percent of people who filed for bankruptcy “cited health costs as a contributing factor.”  In those cases, there would be no fallout for either landlords or employers, assuming that the rent is current and there is no debt that might affect an employer directly.  However, if someone has a discharged Chapter 7 bankruptcy in the previous eight years or a discharged Chapter 13 in the previous four years, that is not an option.

Third, then, is that the creditor gets a judgment against the debtor and a wage garnishment.  In that case, several other bills might go unpaid, car payments and rents being two.  That would, of course, be a major concern to both employers and landlords.  For employers, in addition to the hassle of accounting for a wage garnishment, the employee’s car may be repossessed, meaning he or she will at best have trouble getting to work. At worst, he or she won’t be able to get to work on time, or at all.

So pulling credit reports on prospective employees and tenants is a wise decision.  For rental owners, it is a necessity.  Collections can result in judgments and garnishments, which often result in evictions for nonpayment of rent.  For employers, it can mean someone who might be a terrific employee will have trouble getting to work and be continually dealing with personal problems that will affect his or her work performance.

Does that mean that landlords should hesitate to rent to people with past due, 90-plus days, and collection medical and other debts?  Absolutely.  You don’t want their problem to become yours.

Does that mean that employers should hesitate to hire people with problem debts?  That depends on the individual and the circumstances.  Only the employer knows what will work in a specific situation. Simply take into consideration the possible eventualities of a bad debt.

Regardless, careful screening can pay dividends in the people you don’t hire or don’t rent to.

By Robert L. Cain

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