Non-mortgage consumer debt reached $2.4 trillion in 2004, the Federal Reserve reported recently. That's $20,000 per household. The average car loan financed in 2004 was $24,888, today it is $27,000 for a length of five years. As debt increases, so does bad debt. When an individual's debt to income rises over 25-30%, the likelihood of stepping into insurmountable circumstances is inevitable. Many have theories from skyrocketing credit card approvals to societal trends. No matter which reason, it is now more important for a property manager to recover debts because competition and home ownership make rental profits that much more elusive.
The distribution of credit-card debt is very uneven. Some people have no cards, and one-third of households pay off their balances each month. Of the 50% to 60% who carry credit-card balances, a large minority have only a few thousand dollars on their cards. Just over a third of all households have sizable balances of $10,000 or more.
"The problem is, people don't realize that credit cards are just plastic cash," says Chris Bender, Communications Manager for the National Foundation for Credit Counseling in the U.S.. "They think when they pay with credit cards they don't have to pay for it quickly, and so they don't keep track of what they spend. When you hand someone cash, it's a psychological wake-up. 'Why, I just gave away $40.' When you charge something, you don't see the money go, and in your mind that makes a difference."
Mortgage debt is harder to evaluate. First, the interest on a mortgage is tax-deductible. And second, you have to live somewhere. So even if you avoided buying a home with a mortgage, you would be paying rent instead. Given the tax benefits and the fact that part of your mortgage payment would otherwise go for rent, mortgage debt is not as much of a liability as credit-card debt is.
Perhaps the most informative statistic the Federal Reserve calculates is the household debt-service ratio, which gauges the total burden of payments on all kinds of debt, including mortgages. Currently, it’s 11.5% of disposable after-tax income. That’s actually the lowest the ratio has been since 1995, but could rise sharply the next time interest rates move up. And it’s a figure that combines people who rent or have paid off their homes with people who have recently bought expensive houses.
Property Managers have to qualify every applicant with thorough background check and income verification. Even the most comprehensive checks cannot guarantee that 100% of residents will complete their rental agreements. In the rental industry, bad debts are inevitable and recovering this debt is essential.
Landlord2Landlord has a National Bad Debt Recovery Program which allows property managers to track bad debt collections accounts with an online collections log.
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