TIME Money

Study: 35% of Americans Facing Debt Collectors

The word "Bankruptcy" is painted on the side of a building in Detroit on Oct. 25, 2013.
The word "Bankruptcy" is painted on the side of a building in Detroit on Oct. 25, 2013. Joshua Lott—Reuters

The delinquent debt is overwhelmingly concentrated in Southern and western states

(WASHINGTON) — More than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released Tuesday by the Urban Institute.

These consumers fall behind on credit cards or hospital bills. Their mortgages, auto loans or student debt pile up, unpaid. Even past-due gym membership fees or cellphone contracts can end up with a collection agency, potentially hurting credit scores and job prospects, said Caroline Ratcliffe, a senior fellow at the Washington-based think tank.

“Roughly, every third person you pass on the street is going to have debt in collections,” Ratcliffe said. “It can tip employers’ hiring decisions, or whether or not you get that apartment.”

The study found that 35.1 percent of people with credit records had been reported to collections for debt that averaged $5,178, based on September 2013 records. The study points to a disturbing trend: The share of Americans in collections has remained relatively constant, even as the country as a whole has whittled down the size of its credit card debt since the official end of the Great Recession in the middle of 2009.

As a share of people’s income, credit card debt has reached its lowest level in more than a decade, according to the American Bankers Association. People increasingly pay off balances each month. Just 2.44 percent of card accounts are overdue by 30 days or more, versus the 15-year average of 3.82 percent.

Yet roughly the same percentage of people are still getting reported for unpaid bills, according to the Urban Institute study performed in conjunction with researchers from the Consumer Credit Research Institute. Their figures nearly match the 36.5 percent of people in collections reported by a 2004 Federal Reserve analysis.

All of this has reshaped the economy. The collections industry employs 140,000 workers who recover $50 billion each year, according to a separate study published this year by the Federal Reserve’s Philadelphia bank branch.

The delinquent debt is overwhelmingly concentrated in Southern and Western states. Texas cities have a large share of their populations being reported to collection agencies: Dallas (44.3 percent); El Paso (44.4 percent), Houston (43.7 percent), McAllen (51.7 percent) and San Antonio (44.5 percent).

Almost half of Las Vegas residents— many of whom bore the brunt of the housing bust that sparked the recession— have debt in collections. Other Southern cities have a disproportionate number of their people facing debt collectors, including Orlando and Jacksonville, Florida; Memphis, Tennessee; Columbia, South Carolina; and Jackson, Mississippi.

Other cities have populations that have largely managed to repay their bills on time. Just 20.1 percent of Minneapolis residents have debts in collection. Boston, Honolulu and San Jose, California, are similarly low.

Only about 20 percent of Americans with credit records have any debt at all. Yet high debt levels don’t always lead to more delinquencies, since the debt largely comes from mortgages.

An average San Jose resident has $97,150 in total debt, with 84 percent of it tied to a mortgage. But because incomes and real estate values are higher in the technology hub, those residents are less likely to be delinquent.

By contrast, the average person in the Texas city of McAllen has only $23,546 in debt, yet more than half of the population has debt in collections, more than anywhere else in the United States.

The Urban Institute’s Ratcliffe said that stagnant incomes are key to why some parts of the country are struggling to repay their debt.

Wages have barely kept up with inflation during the five-year recovery, according to Labor Department figures. And a separate measure by Wells Fargo found that after-tax income fell for the bottom 20 percent of earners during the same period.

MONEY The Economy

Think the Fed Should Raise Rates Quickly? Ask Sweden How That Worked Out

Raising interest rates brought the Swedish economy toward deflation Ewa Ahlin—Corbis

Some investors are impatient for the Fed to raise interest rates. They may want to be a little more patient after hearing what happened to Sweden.

If you’re a saver, or if bonds make up a sizable portion of your portfolio, chances are you’re not the biggest fan of the Federal Reserve these days.

That’s because ever since the financial crisis, the nation’s central bank has kept short-term interest rates at practically zero, meaning your savings accounts and bonds are yielding next to nothing. The Fed has also added trillions of dollars to its balance sheet by buying up longer-term bonds and other assets in an effort to lower long-term interest rates.

Thanks to some positive economic news — like the recent jobs report — lots of people (investors, not workers) think the Fed has done enough to get the economy on its feet and worry inflation could spike if monetary policy stays “loose,” as Dallas Fed President Richard Fisher recently put it.

If you want to know why the argument Fisher and other inflation hawks are pushing hasn’t carried the day, you may want to look to Sweden.

Like most developed nations, Sweden fell into a recession in the global financial crisis. But unlike its counterparts, it rebounded rather quickly. Or at least, that’s how it looked.

As Neil Irwin wrote in the Washington Post back in 2011, “unlike other countries, (Sweden) is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe.”

Even though the Swedish economy showed few signs of inflation and still suffered from relatively high unemployment, central bankers in Stockholm worried that low interest rates over time would lead to a real estate bubble. So board members of the Riksbank, Sweden’s central bank, decided to raise interest rates (from 0.25% to eventually 2%) believing that the threat posed by asset bubbles (housing) inflated by easy money outweighed the negative side effects caused by tightening the spigot in a depressed economy.

What happened? Well…

Per Nobel Prize-winning economist Paul Krugman in the New York Times:

“Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”

And deflation is a particularly nasty sort of business. When deflation hits, the real amount of money that you owe increases since the value of that debt is now larger than it was when you incurred it.

It also takes time to wring deflation out of the economy. Indeed, Swedish prices have floated around 0% for a while now, despite the Riksbank’s inflation goal of 2%. Plus, as former Riksbank board member Lars E. O. Svensson notes, “Lower inflation than anticipated in wage negotiations leads to higher real wages than anticipated. This in turns leads to many people without safe jobs losing their jobs and becoming unemployed.” Svensson, it should be noted, opposed the rate hike.

image (8)
Sweden

Moreover, economic growth has stagnated. After growing so strongly in 2010, Sweden’s gross domestic product began expanding more slowly in recent years and contracted in the first quarter of 2014 by 0.1% thanks in large part to falling exports.

As a result, Sweden reversed policy at the end of 2011 and started to pare its interest rate. The central bank recently cut the so-called “repo” rate by half a percentage point to 0.25%, more than analysts estimated. The hope is that out-and-out deflation will be avoided.

So the next time you’re inclined to ask the heavens why rates in America are still so low, remember Sweden and the scourge of deflation. Ask yourself if you want to take the risk that your debts (think mortgage) will become even more onerous.

MONEY Debt

Have You Conquered Debt? Tell Us Your Story

Have you gotten rid of a big IOU on your balance sheet, or at least made significant progress toward that end? MONEY wants to hear your digging-out-of-debt stories, to share with and inspire our readers who might be in similar situations.

Use the confidential form below to tell us about it. What kind of debt did you have, and how much? How did you erase it—or what are you currently doing? What advice do you have for other people in your situation? We’re interested in stories about all kinds of debt, from student loans to credit cards to car loans to mortgages.

Please also let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

TIME Congress

The Tricky Gimmick Congress Will Use to Fund Your Highways

Congress pays for a 10 month fix now by threatening greater deficits later.

On Monday night the White House endorsed the House Republicans’ plan to keep the Highway Trust Fund—which finances highways, roads and bridges—alive for the next 10 months, saving about 700,000 jobs. While the bill will bring the Transportation Department program back from the brink of a crisis, it uses an accounting trick known as “pension smoothing” to pay for it. Here’s a guide on why the short-term revenue raiser is no good for the long haul.

What is pension smoothing and why should I care about it?

Pension smoothing raises money for the government in the short term in exchange for increasing the debt over the long term. By reducing pension contribution requirements, pension smoothing temporarily increases companies’ taxable income to raise revenue for the government. But over the long-term, companies will be on the hook to contribute more to their pension funds, lowering tax revenue. Some conservatives, including fellows at the Heritage Foundation and Keith Hennessy, a senior White House economic advisor under President George W. Bush, have warned that pension smoothing increases the risk of a taxpayer funded bailout of the Pension Benefit Guaranty Corporation, the government insurance company that protects pensioners from risk in their private plans.

Does anyone like it?

Congress in the past has turned to the tactic in dire situations (see next question) because it is pro-employer and a revenue raiser in the short-term. Since the Congressional Budget Office scores bills in 10-year windows, supporters of the House and Senate bills to save the Highway Trust Fund can avoid questions about raising deficits in the long-term.

It’s no one’s ideal revenue raiser. Sen. Orrin Hatch of Utah, the top Republican on the Finance Committee, told TIME last week he’s “not real happy about pension smoothing,” but still “dedicated” to passing this year’s fix. On Tuesday, reporters asked House Speaker Boehner at a press conference why he would support pension smoothing, which Republicans decried earlier this year as a gimmick when Democrats wanted to use it to fund an emergency unemployment insurance extension.

“These are difficult decisions in difficult times in an election year,” said Boehner. “It is a solid piece of legislation that will solve the problem in the short-term. The long-term problem is still there and needs to be addressed.”

Several outside think tanks and media organizations have announced their opposition to pension smoothing, including the left-leaning Center on Budget and Policy Priorities, the editorial board of the Washington Post, the bipartisan Committee for a Responsible Federal Budget and the conservative Heritage Foundation.

Has pension smoothing been used before?

In 2012, Congress first turned to the revenue-raising gimmick to fill another transportation funding shortfall. Last year, Sen. Susan Collins (R-Maine) included it as part of a failed proposal to repeal an Obamacare provision and end the government shutdown. Earlier this year, Senate Democrats and a handful of Republicans tried to use it to extend unemployment insurance. Now it will be used to save the Highway Trust Fund from insolvency.

What are the alternatives?

A month ago, Sens. Chris Murphy (D-Conn.) and Bob Corker (R-Tenn.) introduced a bill to raise the federal gas tax (currently around 18 cents a gallon), which hasn’t been changed since 1993 and is the main source of financing the Highway Trust Fund. The Corker-Murphy bill would address the cash-strapped program by increasing the tax by 6 cents in each of the next two years and then index the rate to inflation. Besides the Corker-Murphy bill, Congress could tax drivers on how many miles they drive and communities could set up more tollbooths. Other potential long-term solutions are in the works but unlikely to pass this year.

MONEY Student Loans

WATCH: Why Illinois is Suing Over Student Loans

Illinois is suing debt consolidation companies for allegedly fraudulent student loan practices.

MONEY Divorce

The 7 Biggest Money Mistakes That Divorcing Women Make

Divorcing couple arguing
Hybrid Images—Getty Images/Cultura RF

A financial planner flags the costly errors women commonly make when a marriage breaks up.

Divorce, in my experience, is about two things: children and money.

The courts in most states typically will prioritize children’s interests first and foremost. Courts will also protect children’s entitlements by enforcing child support.

Unfortunately, there isn’t a comparable authority that protects a divorcing spouse’s financial needs. The law simply mandates a fair and reasonable financial outcome.

And beware: Dividing marital property is almost always a one-shot deal, for better or worse. Simply thinking that your outcome is unfair is not enough to try to reopen your judgment. To successfully appeal a division of property, you have to clear a very high bar: You have to prove that the divorce court made a mistake when considering the facts of the divorce or applying the divorce laws in your state to the case. Alternatively, you have to prove fraud or duress.

Over the course of years working with divorced and divorcing spouses, I’ve found some common financial mistakes that women make that threaten their financial security.

I’ve listed the mistakes here so you can be forewarned. Let me add a word of caution, though. It’s not enough to know that these issues can be a problem. You may feel as though you can handle them on your own. But with many of them, it is crucial you seek expert financial advice.

  1. Trading off part of the financial settlement you’re entitled to in exchange for securing child custody or greater visitation time.
  2. Underestimating your financial needs and assuming you can reduce your budget without consideration of the proportion of fixed overhead expenses.
  3. Believing in the “lawyer knows best” myth and letting your attorney dictate what your goals are and what your best short- and long-term outcomes are. You must be knowledgeable and responsible for your own financial security.
  4. Deciding financial issues one at a time and neglecting the interaction of factors such as income taxes, capital gains taxes, investment risk, inflation, and transferability of assets. All parts move like pieces in a puzzle and affect each other; they fall into place when you understand the comprehensive picture.
  5. Failing to adequately “insure” (that is, make enforceable) financial provisions of a settlement. If your spouse becomes disabled or dies, you may lose your support. You must protect your rights to your financial entitlements via life insurance on the payor.
  6. Failing to address unsecured debts or develop strategies for paying them off before your divorce is final. Unlike divorce — which is governed by state law — credit card debts and commercial loans are governed by federal law. Creditors do not care if your ex-spouse fails to pay off your debt as ordered in your settlement agreement. It is still your debt.
  7. Not planning, before the divorce is finalized, how to handle post-divorce financial issues such transferring pension benefits, securing health insurance, and changing ownership of accounts.

—————————————-

Vasileff received the Association of Divorce Financial Planners’ 2013 Pioneering Award for her public advocacy and leadership in the field of divorce financial planning. Vasileff is president emeritus of the ADFP and is a member of NAPFA, FPA, and IACP. She is president and founder of Divorce and Money Matters, serving clients nationwide from Greenwich, Conn. Her website is www.divorcematters.com.

MONEY credit cards

The One Credit Card You Need to Ease Pain at the Pump This Summer

paying for gas
The right credit card can provide an antidote to pain at the pump. Ana Abejon—Getty Images

You can get as much as 5% back if you swipe it right.

If you’ll be spending part of this July 4th weekend in the car—whether that’s for a day trip to the beach or a 500-mile drive to visit the in-laws—be prepared to pay more at the pump this year than last. A gallon of regular gasoline sits at $3.70, according to the U.S. Energy Information Administration, or about 9% higher than in 2013.

Those in the know, however, will be able to get a discount that mitigates the price escalation. How, you ask? With a cash back rewards card that gives them some extra juice at the gas station.

The picks that follow can get you up to 5% back on your purchase at the pump. You’ll notice something about these selections: None of them are gas-station-branded cards. The ones below offer more flexibility and more money back.

If you want to get the most money back possible…

We at Money are pretty big fans of the class of credit cards that offer 5% cash back in rotating categories. Within the category, both the Chase Freedom and Discover It offer 5% at the pump from July to September on the first $1,500 spent. That means if you spend $250 a month on gas, you’ll end up saving almost $40.

If you’re planning a cross-country road trip, it might pay to sign up for both. The Freedom and It cards are fee-free, so there’s no downside to doubling up.

But if you’re only planning on getting one, go for the Chase Freedom, which offers a $100 sign-up bonus after you spend $500 in the first three months, says CreditCardForum.com’s Ben Woolsey.

If you’d rather have an all-purpose card…

Managing a number of credit cards for specific categories can be daunting for some consumers. If that’s you, check out solid cash back cards that offer good rewards throughout the year. BankAmericard Cash Rewards holders, for instance, earn 3% on the first $1,500 spent at gas stations the entire year without having to pay an annual fee. There’s also a $100 sign-up bonus once you spent $500 in the first three months.

Also consider Money’s Best Credit Card winner American Express Blue Cash Preferred. While this card comes with a $75 fee, you receive 3% back at gas stations in addition to a $150 sign-up bonus if you spend $1,000 in the first three months. Where it comes out ahead of the BankAmericard is if you’ll also use it at the supermarket, since the best feature of Blue Cash Preferred is the 6% cash back you get on the first $6,000 spent on groceries.

TIME

Unemployed and in Debt, Young Americans Ask Congress for Help

Five years after the end of the Great Recession, America's young adults are still facing economic challenges.

For many millennials, the future looks bleak. “We don’t just face dreams that are deferred, we face dreams that are destroyed,” Emma Kallaway, executive director of the Oregon Student Association, told the Senate Subcommittee on Economic Policy Wednesday. But if they were hoping for answers from Congress, Kallaway and other young adults across America facing frustrations with student loan debt and the sluggish job market will have to wait.

Senate Democrats convened the subcommittee hearing entitled “Dreams Deferred: Young Workers and Recent Graduates in the U.S. Economy” to highlight youth unemployment and heavy student loan debt after Sen. Elizabeth Warren’s (D-MA) student loan bill stalled in the Senate earlier this month. Warren’s bill would have allowed an estimated 25 million people with long-existing student loan debt to refinance at lower interest rates.

Just 63.4% of youth aged 18-29 are employed, Keith Hall, senior research fellow at George Mason University, reported in his testimony. The unemployment rate of workers under the age of 25 is 13.2%, more than twice the overall rate of unemployment.

As joblessness remains high, the cost of college continues to rise, compounding already hard-to-manage debt levels for many young Americans. Student debt in the U.S. now tops $1.2 trillion, according to Rory O’Sullivan, deputy director of the non-profit group Young Invincibles.

“It sounds like perfect storm in a way,” said subcommittee chair Sen. Jeff Merkley (D-OR) of the snowball effects of the Great Recession on young adults.

Youth unemployment also affects overall spending in the broader economy because young adults cannot afford to move out of their parents’ house, buy big items like cars and homes, and get married. Taxpayers bear some of that burden. Youth unemployment deprives the federal government of over $4,100 in potential income taxes and Federal Insurance Contributions Act taxes per 18-24 year old every year, and almost $9,900 per 25-34 year old, according to a recent study by Young Invincibles. That translates into an additional $170 of entitlement costs per taxpayer in the federal budget.

If the problem is clear, the solution is not. Witnesses at the hearing variously suggested state disinvestment in higher education, simplifying the federal aid application and repayment process, offering relief for existing borrowers, and holding institutions more accountable for providing affordable, quality credentials to graduating students.

Merkley asked the panel for their opinions on the merits of the “Pay It Forward” Guaranteed College Affordability Act, which would allow students to go to college without paying up front. Instead, students sign a contract to join an income-based repayment plan for a designated period of time after graduation. Several states are considering versions of the grant plan; Oregon signed one into law in 2013.

Although Kallaway and O’Sullivan said the plan would possibly circumvent the debt-to-income trap, both agreed it was not a long term fix. Kallaway believes the solution is to tackle the problem at the root, in high education costs, and not at the repayment level. “More affordable education upfront is what’s right,” Kallaway said. “Federal student loans should not be a form of income for the government.”

Hall believes that student debt and rising tuition are just symptoms of a larger disease. High unemployment numbers aren’t just an issue for young adults, he pointed out. The problem, he said, is a poorly functioning economy. “Until you solve this labor market problem […] this problem is not going away,” he said. “You’re going to have these continuing symptoms.”

MONEY Savings

Despite Lessons of Recession, Many Are Ill-Prepared for a Crisis

Emergency box broken
Peter Crowther—Getty Images

One in four Americans have no savings set aside for an emergency, a new survey finds.

When it comes to your finances, you need to be prepared for the unexpected: a gap between jobs, a health crisis, a leaky roof that needs to be repaired. But 26% of Americans have no savings set aside for an emergency, according to a new report from Bankrate.com.

What’s more, many of those who do have a rainy day fund have too small of one. Only 23% of Americans say they have set aside at least six months’ worth of living expenses—the commonly recommended minimum. For 24% of Americans, an emergency fund would last less than three months, the survey found; another 17% have enough money for three to five months of expenses.

Americans have been poor savers for decades, notes Bankrate.com financial analyst Greg McBride. “What did change since the recession was the recognition of the importance of emergency savings,” says McBride. “Americans know that having emergency savings is important, they know they don’t have enough, and they feel very uncomfortable about that. But despite that, they’re just not making any progress.”

These findings jibe with MONEY’s recent survey of Americans and their finances, which found that while Americans are exercising more financial restraint than they did before the recession, they still aren’t saving as much as they should.

Six in 10 told MONEY that they were trying to build their emergency savings, up from less than 25% who said the same in 2009; three-quarters reported cutting back on spending. Still, 58% wouldn’t be able to handle an unexpected $10,000 expense. Even high-income families would feel the pinch—38% of those earning more than $100,000 said they wouldn’t be able to cover a $10,000 surprise.

Similarly, the Bankrate survey found that insufficient savings crosses all income groups: Among households with incomes of $75,000 or more, only 46% have a six-month emergency reserve.

Another alarming finding: Americans age 30 to 49 are the worst off. One-third don’t have anything saved for a rainy day.

“That’s a pretty scary finding in that they are more likely to have the house, two cars, three kids, the dog,” McBride says. “They need those emergency savings more than anybody.”

The bright spot? Millennials may have learned from their elders’ mistakes. More than half—54%—have three- to five-months’ worth of expenses set aside in cash.”Young adults have had a front row seats for the recession and the anemic recovery,” says McBride. “They’ve recognized the need for emergency savings.”

Need another impetus to build up your rainy day fund? In MONEY’s recent survey on marriage and money, 25% of couples say they fight about insufficient emergency savings.

For more on budgeting and saving:

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