The bold headlines of late summer – the emergence of ISIS, the vote on Scottish independence, the initial public offering by Chinese e-commerce giant Alibaba –overshadowed a piece of noteworthy research. Slipping under the radar was a critical study by the Urban Institute, a think tank that provides nonpartisan analyses of problems facing the nation.
The findings are alarming. Many Americans are in financial distress in the aftermath of the Great Recession. Thirty-five percent have debt in collections. This consists of debt so far past due – typically 180 days or more – that the account has been closed and turned over to collectors.
Average debt in collections is $5,178. It comprises such items as credit cards, child support, medical bills, and utility bills.
As might be expected, the effects are not equally distributed across the nation. States with the highest debt in collections are in the South. And this part of the country generally has the lowest household income.
The problem is most acute in the West South Central area. This encompasses Arkansas, Louisiana, Oklahoma, and Texas. About 44 percent of residents have debt in collections. This is followed by the East South Central region – Alabama, Kentucky, Mississippi, and Tennessee – at 41.3 percent.
New England is lowest at 25.3 percent. Significantly, this region has the highest average household income of $86,242, well above the national level of $72,254. By contrast, Alabama’s average household income is $58,210.
What conclusions can be drawn from the study? Part of the explanation for the large number of households with debt in collections is stagnating personal income, particularly among the middle class. Median household income today is more than $2,500 below the peak level reached in 1999. Many people have added debt with the expectation that income will rise as the economy recovers.
But the problem goes far beyond declining income. A lack of understanding of financial matters persists. Many people have no concept of budgeting and spending. Nor do they understand the consequences of accumulating excessive debt, especially credit card debt.
That mindset is especially prevalent among the Millennials, those born between 1980 and 1999. As a group, they have a startling lack of knowledge regarding personal finance.
The long-term solution to the problem is increased financial literacy.
Wayne Curtis, a former superintendent of Alabama banks, is a retired Troy University business school dean. Email him at wccurtis39@gmail.com.
