In 2019, 68 million people had debt in collections on their credit report. We can expect this number to increase in the wake of the pandemic, a time when many people will likely experience a rapid decrease in their ability to meet their financial obligations.
In a span of four weeks, more than 22 million people claimed unemployment benefits, and people who face sudden income shocks, like the loss of a job, are more likely to be evicted, miss a housing payment or utility bill, and turn to public benefits.
Because this is an unprecedented crisis, no one knows exactly how consumers with outstanding debt will fare. What we do know is that it won’t affect everyone equally. The United States’ long history of institutional racism leaves families of color especially vulnerable to financial hardship, and people living in the South disproportionately struggle with delinquent debt.
Having debt in collections creates immediate and longer-term problems
Delinquent debt can result from unpaid bills, including medical bills, utility bills, parking tickets, and membership fees. When debt is more than 180 days past due, it enters collections and can be reported to credit bureaus.
Most American adults—227 million, or 89 percent—have a credit file. Using a random sample of deidentified, consumer-level records from a major credit bureau, we estimate that in 2019, 30 percent of them, or about 68 million US adults, had debt in collections reported in their credit files. The credit bureau data are from 2019 and contain more than 5 million records.
Without added support and protections during the pandemic, consumers will miss payments and damage their credit health. A damaged credit score makes it harder to borrow or access credit, like a mortgage or small-business loan. It also means that when you do borrow, it will cost more. (Resources for consumers in financial distress include the National Consumer Law Center’s Surviving Debt and other tips and advice.)
But it’s not just about borrowing—credit affects other parts of life, too. Credit report information is used to determine eligibility for jobs, access to rental housing and mortgages, insurance premiums, and access to (and the price of) credit in general.
Will the CARES Act help delinquent borrowers?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act suspends federal student loan interest accrual and involuntary collection through the end of September. Similarly, homeowners with federally backed mortgages can now request forbearance if they are experiencing financial hardship, which protects them from foreclosure and prevents the accrual of interest and fees for up to 180 days. And until September 21, Social Security benefits will not be offset to satisfy delinquent government debt.
Once they arrive, the Internal Revenue Service’s (IRS’s) direct payments to consumers will help people meet basic needs in the short term and avoid taking on more debt. The CARES Act protects these checks from being garnished to pay delinquent debts to federal, state, or local governments.
However, the checks are not necessarily protected against garnishment from private entities (PDF), and they were not intended to help people pay off their existing debt. The median amount of debt in collections before this crisis was $1,775. Many families will receive more than that from the IRS, but they will also need to use those checks to meet immediate basic needs, like rent and food. Likewise, the bill does little to protect consumers’ credit scores against new defaults or delinquencies.
State and local policymakers and financial institutions can fill some remaining gaps
States can stop nonpayment-related utility disconnections during the pandemic. About half have already taken this step. Both state and local governments can go further by suspending interest and pausing collections activities on state and local debts during the pandemic.
As an emergency preventative measure against ballooning medical delinquent debt, some states are opening special health insurance enrollment periods and brokering deals with private insurance companies to limit out-of-pocket costs on COVID-19 testing and treatment.
Responding to medical debt will be crucial; 16 percent of adults with a credit file had past-due medical debt in 2018, and as people get sick and lose their employer-provided insurance, that number will likely increase.
Financial institutions can respond in the short term by offering more affordable small-dollar credit solutions, giving their customers an alternative to dangerous high-interest products. Lenders and debt collectors could suspend payments and collections activities for their customers experiencing hardship during the pandemic, like how the federal government has suspended payments on all student loans and provided relief for mortgage holders.
Together, these short-term solutions could help minimize the inevitable damage this economic crisis will cause to consumers who are already struggling with debt.