- The Federal Reserve Bank of New York (NY Fed) shared data showing that the number of Americans with debt in collections is at an all-time low.
- Medical debt previously made up 58% of collection tradelines, and credit bureaus have stopped reporting medical bills under $500. Furthermore, the temporary pause on student loan repayments has also contributed to the decline in collections.
- The data regarding collections is not representative of the country’s economic health. The need for a comprehensive and accurate evaluation of economic markers that reflect the financial health of American households is paramount.
A Mirage of Economic Strength
The New York Fed shared data this week that shows the number of Americans with debt in collections is at an all-time low. At first glance, these numbers may imply a robust economy, but the reality is far more complex.
The drastic reduction in debt collections owes more to a systematic change in debt reporting rather than reflecting genuine financial stability among American households. Come along with us as we uncover the truth behind these seemingly positive numbers as we delve deeper into this data. Let’s peel back the layers of this financial- and perhaps political- economic illusion.
What Debt Goes to Collections?
First, it helps to know what causes a debt to go to collections. Accounts are generally reported as delinquent after 30 days of non-payment, charged off, and reported as an account in collections after 180 days. Nearly any type of debt can be sent to collections: medical bills, credit card balances, utility bills, and even student loans. Making occasional or regular payments on an account already in collections doesn’t remove it from collections. Accounts remain in collections until they are paid or settled for less than the full amount owed.
The Medical Debt Mirage
Medical debt, which was found to constitute 58% of all collections, is often the result of an unforeseen health crisis that comes with high medical costs.
In recent years, the credit bureaus initiated an unprecedented move- to stop reporting medical bills under $500. These smaller bills are estimated to make up roughly half of the medical debt in collections. This change clearly benefits the consumer and was made for good reason. With an obvious lead-lag effect, this move also drastcally reduced the reported collections debt.
Heralding the reduction of debt in collections as an economic indicator is a premature evaluation demonstrating no real financial improvement. We cannot claim an economic win when we remove half of the largest source of collections.
Changing the rules of credit reporting will always result in a change in how many debts are reported. It doesn’t mean people feel any less financial pressure- they don’t. They weren’t paying those bills in the first place.
Impact of Student Loans Moratorium
The temporary pause on student loans also played a significant part in the reduced debt in collections. However, this is merely a deferral of debt repayment, not an elimination, and therefore does not genuinely represent economic improvement.
After a several-year pandemic-prompted pause, payments on federal student loans resumed in October. Time will tell how much of an economic impact this causes.
The Reality of the Decline in Debt Collections
The decline in debt collections reflects systematic changes in debt reporting; it should not be considered an indication of improved economic health. Therefore, these ‘encouraging signs’ are likely merely smoke and mirrors that portray an unrealistic image of our economy.
We must re-evaluate our economic markers and acknowledge that an economy cannot be gauged on such easily manipulated indicators. As we pivot towards a politically charged environment, we will inevitably see politicians play the role of the economic savior, but the need for truth and transparency is even higher. It’s time we recognize these moves for what they are. We need to peek behind the curtain, challenge the status quo, and unmask the actual state of our economy.
Conclusion
In conclusion, while the decline in debt collections may initially seem like a positive economic indicator, it is crucial to look beyond the surface. The changes in debt reporting and temporary moratoriums may have masked the true reality of America’s financial health.
We should consider a range of factors that accurately reflect the financial health of American households. Housing costs, income vs inflation, homelessness, and more. Only then can we truly understand and address people’s debt situation.
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