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Do you have debt in collections? You are not alone

The Urban Institute recently released a report that found 35 percent of Americans have debt that has gone to collections. That equates to nearly 77 million people across the country.

Debts in the collection process ranged from credit cards and utility bills to unpaid gym memberships or cellphone charges. Some of the debts were small, such an overlooked monthly water bill. But the median debt a typical adult had in collections was $1,350.

The study only looked at nonmortgage debt. These debts had been past due more than 180 days and sent to collections. The study only looked at those with a credit file, which excluded nearly 22 million or the poorest Americans who do not qualify for credit in the first place.

Results underscore the stresses that are affecting middle-class families. Regional differences also showed up. Nevada had the worst problem with almost half of its residents dealing with a debt in collections. Problems with debt were also prevalent in many Southern states, including Tennessee and many of its neighboring states.

Delinquent debt, even a small $100 debt that goes into collections, can easily lower a credit score. According to the report, a minor problem can “snowball” as old bills are submitted to collection agencies. Once a credit score is tarnished, it can affect borrowing costs, eligibility for jobs and even insurance premiums.

The Urban Institute concluded that limited access to credit associated with delinquent debt hurts families and their communities.

Chapter 7 bankruptcy can stop the snowball effect by discharging unsecured debts. Bankruptcy will also lower a credit score, but it ends creditor harassment and provides a financial reset.

Source: NPR, "Chances Are Pretty Good That's A Bill Collector Calling," Marilyn Geewax, July 29, 2014.

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Rothschild & Ausbrooks, PLLC
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