The voices of Urban Institute's researchers and staff
July 25, 2016

Why are debt collections so prevalent in black and Latino neighborhoods?

July 25, 2016

Earlier this month, President Barack Obama provided a status update on the Affordable Care Act and US health care reform in the Journal of the American Medical Association. The article—the first written by a sitting president—highlighted that the Affordable Care Act has raised Americans’ insurance rate from 84 percent in 2010 to 90.9 percent in 2015.

More families can now worry less about their health, and the increased coverage can help relieve financial pressure on those already struggling. Medical debt is the largest source of personal bankruptcy and even when people are insured, medical expenses can be large and hard to maintain.

A new working paper from the Urban Institute shows that lack of insurance coverage is associated with high rates of debt in collections in neighborhoods across the country. Another factor associated with debt in collections, however, is the percentage of black and Latino residents.

That association sustains even after accounting for area income, unemployment, levels of education, and home values, all of which help explain why some places seem to struggle more with paying bills than others. But why should the percentage of blacks and Latinos matter?

Black and Latino families have far less savings and wealth than white families, even white families with similar incomes and education levels.

An investigative report by ProPublica shows why race and location could matter for delinquent debt. State and local laws may make it simpler for creditors to sell delinquent debt to collectors, or may allow collectors easier access to wage garnishment. This can be especially damaging for residents of segregated metros, where predominantly black and Latino neighborhoods experience higher poverty rates and hampered property value growth.

The kind of debt could be localized as well. The report notes that the Metropolitan St. Louis Sewer District could not cut off water and sewer service to people’s homes, even if they did not pay the bill. As a result, cash-strapped families who fell behind on the bill would prioritize more immediate ones until the sewer district filed suits in district court, requiring families to pay back what they owed. Many more judgments were filed in black neighborhoods, where the incomes were typically lower than nearby white neighborhoods. In the predominantly black suburb of Jennings, nearly one-third of the 15,000 residents had received a collection judgment in recent years. It should not be surprising that the same detrimental effects of segregation that lead to less wealth and lower income can lead to higher rates of debt collection.  

Urban’s paper finds that a lack of health insurance could also be part of why some families struggle to pay debt. Medical bills can be large even with insurance, so if a family gets behind on something as simple and small as a utility bill, an unexpected trip to the emergency room for asthma or a stomach virus could completely derail finances for a family without insurance. The report authors argue that if health insurance coverage nationwide was 5 percentage points higher, the United States could save $22 billion in debt collections. Given that blacks and Latinos have lower insurance rates than whites, increasing the number of insured would not just increase racial equity in health, but would also go a long way in relieving the heavy financial burdens on many minority households.

Retired Atlanta police Det. Jaqueline Barber stands in her kitchen in the home she shares with her daughter and four grandchildren, Monday, Oct. 8, 2012, in Fayetteville, Georgia. Barber said she is under threat of eviction after her medical bills mounted, partly because of a diagnosis of multiple myeloma, a form of blood cell cancer. If she's evicted, she expects that she will be homeless. Photo by David Goldman/AP

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