01 October 2014

The Geography Of Bad Consumer Debt

The problem of people who don't or can't pay their consumer debts is ubiquitous.

About 94% of all census tracts in the United States (which average about 4,000 people each), have someone living there with a credit report indicating that they are 30 days or more overdue on one of their currently outstanding non-mortgage consumer debts (i.e. they have "bad debts").  And, 99.99% of census tracts have someone living there who has had a debt referred to collections in the last seven years for a non-mortgage consumer debt (i.e. they have "been referred to collections").

The two groups, unsurprisingly, overlap.  About 79% of people with bad debts have been referred to collections at some point in the past seven years.  About 11% of people with credit reports don't have any debts (like a mortgage or credit card debts or a car loan or a student loan) of a type that would ordinarily be reported to a credit reporting agency, but have had some other debt (like an unpaid utility bill or medical bill) that has been reported to collections, causing a file to be established with a credit reporting agency.

Geographic Trends

But, there is wide regional variation within the United States in the amount of bad debt outstanding and of the percentage of people that have been referred to collections.

The Geography Bad Debt

In the 1% of census tracts with the highest percentage of people with bad debts, 40% of which are in Texas or Louisiana, 15% or more of people with credit reports have bad debt (about 0.05% have more than 25%).
Across the 50 states and Washington, DC, three states have less than 4 percent of the credit file population with debt past due: Utah, Washington, and New Jersey. Three states have more than 7 percent of their credit file population with debt past due: Louisiana, Texas, and Mississippi.

Across the largest 100 metropolitan statistical areas (MSAs), Salt Lake City, Utah, has the lowest fraction of people with debt past due reported at 3.2 percent (appendix table A.2), followed by San Jose, California, and Seattle, Washington, at 3.5 percent. Some Texas and Louisiana MSAs are at the other end of the spectrum. In McAllen, Texas, 10.1 percent of people with credit files have debt past due reported; in El Paso, Texas, San Antonio, Texas, Baton Rouge, Louisiana, and New Orleans, Louisiana, approximately 9 percent of people with credit files have debt past due reported.
The Geography of Debts Referred To Collections

In the 1% of census tracts with the highest percentage of people who have been referred to collections, 75% of people with credit reports have been referred to collections.  Most of those census tracts are in the South or Appalachia.
Nevada . . . tops the list . . . 47 percent of people with a credit file have reported debt in collections. The District of Columbia and an additional 12 states (11 in the South) are over the 40 percent mark: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Texas, and West Virginia.

At the low end are three Midwestern states— Minnesota, North Dakota, and South Dakota—which have a substantially lower, yet still considerable, 20 percent of people with reported debt in collections.
How Much Is At Stake?

The amounts of unpaid debts in these cases is usually quite modest.

The average amount of money that a person with bad debt must pay to be brought current is $2,258 (the median amount is $651).

The average amount of a debt referred to collections is $5,178 (the median amount is $1,349) and shows only modest regional variation, with the Southern states that have the highest rates of debts referred to collections tending to have small amounts owed.


Not Household Income

Variation in household income is only weakly correlated with bad debt rates, accounting for only 9% of the observed variation in the percentage of people with bad debt and only about 1% of the variation in the amount of bad debt owed by people who have bad debts.

The quite modest median dollar amounts of the bad debts and debts referred to collection relative to household income, and the only modest correlations between bad debt rates and household income, suggest that economic stress is not the predominant source of the regional differences in bad debt rates.  Average difference of a few hundred dollars in consumer debt financed debt spending, or personal consumption spending of people with consumer debt, would make a very large difference in the percentage of people with bad debt in any given place, since the median amount of bad debt is so modest.

Race Is A Minor Factor

At first blush, race looks like it could be a significant fact, and it probably has a statistically significant correlation.  The South, which has the most bad debt, also has a much larger African-American population than the rest of the United States.  But, upon closer examination, race appears to be a fairly modest issue.

While many places with high rates of bad debt and debt referred to collections have large African-American populations.  Others, like West Virginia, Texas and Nevada do not have particularly large African American populations.  Many of the states with very low and very high rates of bad debt have very small Hispanic populations.  And, states at any given band of rates of bad debt and debts referred to collection have wide variations in the size of their Hispanic and their combined black and Hispanic populations.

This impressions is reinforced when looking at more targeted metropolitan area statistics.  Many poor, depressed Rust Belt cities with large African-American populations have relatively modest bad debt rates and rates of debts referred to collection, compared to more prosperous metropolitan areas in the South with similar demographics.  If rate (or unemployment rates which are strongly correlated with race) were driving the disparities, one would expect these places to have similar rates of bad debt, instead of quite different rates.

Instead, Detroit, which is overwhelmingly African-American, has considerably low rates of cases referred to collection than, for example, Houston or Dallas.

The Housing Bubble Looks Unlikely As A Factor

Nevada and Florida, which were among the states hardest hit by the housing bubble collapse, has a very high rate of debts referred to collection.  But, California, which was also severely hit by it, does not.  And, Texas, which was largely spared, also does not.

Other Possible Causes

There are at least two other kinds possible causes look more plausible.

* State Level Legal Differences That Vary By Region

One possible source for the regional variation has legal sources.

Many states with high rates of bad debts and debts referred to collections also have generous laws protecting property from being collected by creditors, while regions with low rates of bad debts and debt referred to collections.  Texas and Florida, for example, have generous homestead exemptions that protect virtually all real estate equity from the claims of consumer debt creditors.

Also, while average household income isn't strongly correlated with bad debt, the federal bankruptcy protection means test for obtaining a Chapter 7 liquidation in bankruptcy without a payment plan is much more strict in many of the states with high rates of bad debt.

For example, states with high rates of bad debt also typically regulate consumer finance and debt collection less aggressively, have much more regressive state and local tax systems, have less generous social safety net programs, and impose more civil disabilities on people with criminal records.  All of these policy differences could translate into more bad debt.

* Regional Housing Prices

States with high average levels of mortgage debt have lower average levels of non-mortgage consumer debt, and visa versa.  And, this may be one of several relevant factors.

High levels of consumer debt may in places with high bad debt levels may arise because people make more debt financed consumer purchases because they have more money left over after paying their housing expenses.  People who have less consumer debt are less likely to have bad debt.  And, in some places, debt financed consumer spending is less common because everyone had less non-housing money to spend on consumer goods.  For example, people in New York City tend to spend far less on debt financed automobile purchases and far more on rent than people in Texas.

The problem with this explanation, however, is that it fails to explain low rates of bad debt in the Midwest and Plains states where housing is often dirt cheap relative to household incomes.

* Culture May Drive Regional Differences

Many of the areas with high rates of bad debts and debts referred to collection are also places immersed in Southern culture and Evangelical religious beliefs.  This is a culture that emphasizes that people sin and are forgiven, and emphasize God's providence in times when there seems to be no hope, while their Protestant peers in the North tend to place more emphasis culturally, on thrift and on not sinning in the first place and less on forgiveness.  A common translation of the Lord's Prayer in much of the North refers not to people "who trespass" and "trespasses" but to "debtors" and "debts."

It is entirely possible that social norms about the importance of paying one's debts are simply stronger in the North than in the South, and indeed, that differences in the relevant laws between these regions reflect these different attitudes.  The relatively homogeneous trend across the Southern cultural area, and the fact that some Northern States with generous exemptions from creditors (like Minnesota) still have low rates of bad debt, tend to favor this explanation.  The stark disparity between neighboring Nevada and Utah, despite the fact that the state's neighbor each other and actually have quite similar laws on many relevant topics, similarly favor a explanation for the geography of bad debt based upon regional cultural differences.

The Legal Process

The courts of limited jurisdiction where these claims are adjudicated have massive case loads, have loose procedural rules with little pretrial structure, receive little political attention, go largely unnoticed by the media, and adjudicate the vast majority of claims by default or by settlement.

Notably, in collections cases, getting a money judgment from a court is often of only minor relevance to collection success, as finding a source of payment is often the real issue.  And, often, there are rights to repossess property or a security deposit, pursue an insurance claim, harm a person's credit rating, or to refuse to do further business with a consumer (a particularly powerful option in the case of a monopoly like a utility company) that provide remedies for creditors beyond those that a money judgment from a court can offer,  In contrast, it is impossible to get divorced or to conclude a criminal prosecution, for example, without court involvement.

In limited jurisdiction court collection cases, creditors are usually represented by collection agency lawyers who mass produce cases, while debtors are almost always unrepresented since the cost of a lawyer and unlikely prospects of reducing their obligations by paying their own lawyer plus the fees to which a collections lawyer is legally entitled if a collections lawsuit drives up the collection's lawyers' fees when contested, rarely justifies the amount of money judgment reduced through litigation in these cases.  Politically, this means that creditors through their attorneys' have a core of full time professional advocates who may seek political action, while consumer debtors have no similar core of professionals protecting their interests in the courts or in the legislature.

Then again, limited jurisdiction courts offer justice that consumer debtors can afford, are often much more affordable than options like consumer arbitration, and are more management for pro se parties (i.e. people without lawyers) to navigate than general jurisdiction courts that handle bigger disputes.

And, for someone who rents and doesn't have much property subject to creditor's claims other than their wages, the worse case scenario in a court of limited jurisdiction, compared to the outcome that would happen if a lawyer negotiated the claims and litigated, is often not that much different (something that is very much not the case when large debts, often of a business nature, are litigated in general jurisdiction courts and huge concessions can often be secured).  Typically, in large dollar debt collections, the biggest concern is about a loss of asset value due to a fire sale of assets in the collection process, something that is far less of a concern when wage and bank account garnishments are the primary remedies.

Relief from various enforcement approaches is often handled by negotiation rather than as a matter of legal right that a court outside of a federal court bankruptcy system can confer, in any case.

Also, often the problem faced by a consumer debtor is an inability to pay a debt, rather than a material dispute over whether most of it is owed.  In those cases, the end run of bankruptcy court, where consumers are often represented efficiently and inexpensively by lawyers who mass produce consumer bankruptcy cases with heavy paralegal involvement provide a more efficient solution than litigation of individual claims on the merits of the debt in limited jurisdiction courts.

Political Considerations

Partisan considerations aside, policies impacting bad debt and debt collection have broad impact.  Nationally, 35% of people with credit reports have been referred to collections within the last seven years.  Bad debt is also an important issue for almost every business and financial institution involved in extending consumer credit.  Of course, people with a stake in businesses collecting their debts tend to be reliable voters who can donate some money to political campaigns.  They also have an ongoing stake in the issue as repeat players in this legal arena and the wherewithal to do something about it politically, something that stressed consumer debts rarely have available to them.

Only about 3% of people resort to payday loans or pawn loans in a given year, and only a modest share of people who are referred to collections go bankrupt.  So, policies regulating the collections process and consumer finance outside of bankruptcy have wide impact.

It is also not too surprising that pro-debtor legislation like the bankruptcy code and fair debt collection practices act, tends to be federal, since voter turnout in federal elections is higher, while pro-creditor legislation tends to be enacted at the state level where voter turnout is lower.

On the other hand, the number of consumer debtors who have experienced the collections process first hand as debtors vastly outnumbers the number who have experienced it from a creditor's perspective.  And, while consumer debts in the collections process tend to be working class or middle middle class, about 20% of the adult population, mostly those with too few assets and too little income to get credit, don't participate in the consumer finance economy at all.  So, consumer debtors with bad debt are not the most politically vulnerable people in the electorate either.

While the Republican party espouses a pro-business orientation, bad debt, and the need to refer debts to collections, is clearly not something that businesses like to experience.  Consumers obviously, don't like to struggle with their debts either.

States with higher than average rates of bad debt and referrals of debts to collections, are overwhelmingly Red States.  States where bad debt is less common strongly tend to be blue states.  On the other hand, it isn't clear that politicians of either party really understand which policies most strongly influence this process or what kind of influence those policies have.  For example, for the most part, exemption from creditor laws are static with little legislative action from either party away from status quo positions set often many decades in the past.

Of course, if bad debt and referral to collections rates are more a product of cultural norms than legal rules, then maybe legislative action is irrelevant.


All statistics in this post not otherwise sourced come from a July 29, 2014 study by the Urban Institute of the TransUnion credit reporting database (TransUnion is one of the three dominant credit reporting agencies in the United States).

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