Almost one-third of Americans got calls and/or letters from a collection agency in the past year about debts they hadn’t paid. Over half of those, 57 percent, were contacted about two to four debts. So reports the Consumer Finance Protection Bureau (CFPB) in its Consumer Experiences with Debt Collection report.  You don’t get a call from a collection agency unless you are severely delinquent with a bill, usually if you haven’t paid it for 180 days.  Creditors don’t have to wait that long, and some types of bills usually go sooner or later, but that’s the rule of thumb and a step closer to the creditor taking legal action, from which garnishments and attachments can result.

The CFPB report breaks down the collections in several ways, by income, ethnicity, type of debt (bills or loans), and number of errors in the bills under collection.  It is instructive in what we might look for when examining an applicant’s credit.

First, 68 percent of consumers were NOT contacted about a debt in the previous year, but of those who were, 27 percent were contacted about one debt, 57 percent about two to four debts, and 16 percent about five or more debts.

The people with a non-prime, not sub-prime, credit score, that is a FICO score between 640 and 720, were far more likely to be contacted than those with a prime score, 720 or higher. Two in three people, some 66 percent, with a non-prime score were contacted.  And over half, 53 percent of them, had two or more debts in collection.  Over all, people with a non-prime score amount to only 37 percent of the population but have two-thirds of the debts in collection.

By far the most prevalent collection debt for loans was that for a credit or charge card, some 44 percent, followed by student loan debt, 28 percent.  Auto purchase loans were 18 percent, mortgages 12 percent, and payday loans 11 percent.  Student loans have a little more forbearance and become delinquent after the borrower has failed to make a payment for 270 days. That is typically when a student loan gets turned over to a collection agency. (34 Code of Federal Regulations 685.102)

For bills, as opposed to loans, by far the most common was medical bills with 59 percent of the people whom collection agencies contacted owing those followed by telecom bills at 37 percent and utility bills at 28 percent.  Collection agencies also contacted them about taxes, legal judgments or expenses, and rent.  The federal reserve says medical bills amount to more than half of the accounts in collection.

Of particular interest to employers and landlords is the number of auto loans in collection.  Statistics.com reports that .95 percent of all car loans were in default last year but 4.61 percent of sub-prime car loans were, those customers with FICO scores below 640.  Cars can be repossessed after a borrower misses even on payment explains nolo.com, but the collection efforts may continue for the amount of the missed payments.  And depending on the terms of the loan or lease, a lender can even come after a defaulted borrower for the total amount of the contracted unpaid balance.  Thus if you see an auto loan in default, even after the car has been repossessed, your applicant could still get collection calls and notices, and even be sued for the total unpaid balance.  Just think, no car but still in the clutches of a debt collector.

As we might expect, income correlates with the likelihood of loans going to collection.  More than half, 52 percent, of those with incomes of less than $20,000 had debts in collection followed closely by those with incomes between $20,000 and $39,999 at 41 percent.  However, lower income does not correlate with medical bills as those are relatively consistent at around 60 percent across all income levels.

Also of interest is the number of people who said the debt the collector claimed they owed was incorrect.  Some 28 percent said they didn’t owe the debt, a mistake by the creditor.  Another third, 33 percent, said the amount owed was incorrect, and 16 percent said that the debt was that of a family member, not them.  What is important for employers and landlords is that we are in no position to judge the accuracy of a debt, nor are we in a position to offer advice about what a debtor should do.  Our main concern is if the debt, legitimate or not, will affect the work or ability to pay rent of the applicant.

Ideally we hire people and rent to people who are current on their bills.  But we don’t live in an ideal world.  If someone has debts either in collection or past due, we have to decide whether those debts might end up affecting someone’s ability to get to work and work effectively or to pay the rent on time.

Read the full CFPB report at files.consumerfinance.gov/f/documents/201701_cfpb_Debt-Collection-Survey-Report.pdf

by Robert L. Cain