Does being surrounded by people in debt make you more likely to land in debt? That’s one of the provocative questions posed by a new Urban Institute report that examines possible links between geography, neighborhood characteristics and unpaid bills.
While one-third of Americans have a debt in collections on their credit report, that burden is not evenly distributed around the U.S., the report says. For example, residents in Nevada, South Carolina, Mississippi or Texas are more than twice as likely to have an overdue debt than those in North Dakota, Minnesota, Hawaii or Massachusetts.
In general, residents from states in the South and West are far more likely to have overdue debts than those in the Northeast or Midwest, the study shows. (Having a lot of debt, including debt that goes into collections, can affect your credit. To get an idea of where your credit stands, you can view your free credit report summary on Credit.com.)
“While no one would dismiss the importance of individual-level factors when explaining the over-accumulation of debt, and of debt that enters into collections, a robust and growing literature finds that individuals’ financial outcomes are influenced not just by their personal and family dynamics but by the communities in which they live,” the report says.
The Urban Institute examined a random sample of 7 million U.S. consumers’ credit reports from TransUnion’s credit bureau data from September 2013. The data only includes those with a credit file, so the estimated 26 million U.S. consumers without this information (who are more likely to be black, Hispanic and have lower income) are not considered. The report notes that because these groups weren’t factored into the study, they are likely under-represented in the sample.
Correlations Between Debt & Personal Characteristics
There is a connection between indebtedness and several local characteristics, the report suggests, including health insurance coverage rates, unemployment levels, educational attainment, ethnicity and home values. For example, the average neighborhood uninsured rate for individuals without debt in collections is 13.6%, and 17.7% for those with debt in collections. The homeownership rates for those with debts in collection is 62.2%, compared to 68.3% for those without debt.
Among those with debt in collections, the average amount owed is more than $5,000. The median is $1,589.
“Our findings highlight how pervasive debt in collections is,” the report says. “Debt is geographically concentrated … And the average amount of debt in collections is high in states that were most affected by the foreclosure crisis.”
It’s clear how a lack of health insurance coverage could lead to more unpaid debts — a Federal Reserve study in 2014 found that half of all debts in collections are medical debts. Unemployment or foreclosure rates also suggest a direct link. It’s less clear why other characteristics — such as falling home values— would lead to unpaid bills, though that could be a marker of neighborhoods in distress. And underwater homes create other financial stress for owners, such as the inability to refinance, obtain a home equity loan or sell.
Debt & Your Neighborhood
The report theorizes that a “local-level” effect may be at play.
“For example, areas with a high share of unemployed people might make everyone in the area more likely to have debt in collections, regardless of whether the individual is unemployed,” according to the report. “In this case, just being surrounded by unemployed people affects whether a person has debt in collections — possibly through the networks available.”
Given this apparent connection between neighborhood characteristics and debt, the report theorizes that changes in issues like health care coverage or housing values could have a dramatic secondary impact on debt levels.
“Back-of-the-envelope calculations based on the magnitude of our measured relationships suggest that local conditions may play an important role in financial distress,” the report says. “For example, if the share of properties with negative equity across the United States was 10 percentage points lower, then the country might have an estimated $14 billion less in aggregate debt in collections.”
As a local example, the report suggests that if the housing market in Prince George’s County, just outside Washington, D.C., had the same rates of underwater mortgages as that of neighboring Montgomery County, Prince George’s residents could have an estimated $262 million less in debt in collections.
In a similar way, a 5 percentage point increase in health insurance coverage could reduce national debt in collections by $22 billion, the report says.
Here are the top 10 most and least indebted states in the U.S., broken down by percentage of residents with a bill in collections and average debt.
Highest Debt in Collections Rate
- Nevada: 43.5% & $2,968
- South Carolina: 42.6% & $2,350
- Mississippi: 41.9% & $1,892
- Texas: 41.6% & $2,116
- Louisiana: 40.0% & $1,724
- Georgia: 39.0% & $1,804
- D.C.: 38.8% & $1,346
- Florida: 38.3% & $2,358
- Alabama: 37.9% & $2,052
- West Virginia: 37.6% & $1,876
Lowest Debt in Collections Rate
- North Dakota: 17.1% & $901
- Minnesota: 18.2% & $1,002
- Hawaii: 20.5% & $1,172
- Massachusetts: 21.5% & $973
- South Dakota: 22.5% & $1,452
- Nebraska: 23.0% & $1,258
- Montana: 23.5% & $1,556
- Iowa: 24.0% & $1,169
- Connecticut: 24.5% & $1,121
- Wisconsin: 24.6% & $1,278
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