The Balance Sheets of Low-Income Households: What We Know about Their Assets and Liabilities. Debt Burdens

11/01/2007

Measures of debt burden try to place families required debt service payments in relation to the total income and/or assets families have on hand to service these debts. Defining the debt burden as the annual ratio of estimated debt service payments to total family income, we see that median debt burdens are relatively constant across families classified by income and age  in the 1521 percent range for all family income groups and all families headed by a person under age 75 (exhibit 21). While debt burdens for families at very low or high net worth, or older ages (75 or more), are generally less than for other groups (about 13 percent), the presumed significance of homeownership in understanding debt burden is evident in the comparison between renters, who have a median debt burden of 8 percent of their total income, and homeowners, who have a median of 22 percent. By itself, exhibit 21 would imply that families who do not own homes are less burdened by debt than homeowners.

Exhibit 21.
Median Ratio of Debt Payments to Family Income for Debtors, 2004

(in thousands of 2004 dollars)

Exhibit 21. Median Ratio of Debt Payments to Family Income for Debtors, 2004. See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) using the 2004 Survey of Consumer Finances.
Note: Breakout of income quintiles: Q1: <$18,000; Q2: $18,000-$31,999; Q3: $32,000-$51,999; Q4: $52,000-$85,999; Q5: >85,999.

Two measures of financial distress are high debt burdens (debt-to-income ratios greater than 40 percent) and payments past due 60 days or more. The lighter bars in exhibit 22 show the percentage of debtor families by classifier that have high debt burdens. Unlike median family debt burdens, the percentage of families with high debt burdens varies substantially across income groups. About 27 percent of debtor families in the bottom income quintile have high debt burdens, compared with 14 percent in the third quintile and 2 percent in the fifth quintile. Similarly, the percentage of families with payments past due 60 days or more falls as family income increases. These findings suggest that although debt burdens are similar for the typical median family of each income group, moving away from the typical median family uncovers that families in the lower income groups have greater financial distress than families in the higher income groups.

Exhibit 22.
Percentage of Debtor Families With Debt-to-Income Ratios Greater than 40 and
Percentage of Families with Any Payments Past Due 60 Days or More, 2004

Exhibit 22.  Percentage of Debtor Families With Debt-to-Income Ratios Greater than 40 and Percentage of Families with Any Payments Past Due 60 Days or More, 2004. See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) using the 2004 Survey of Consumer Finances.
Note: Breakout of income quintiles: Q1: <$18,000; Q2: $18,000-$31,999; Q3: $32,000-$51,999; Q4: $52,000-$85,999; Q5: >85,999.

Another interesting finding lies in the differences in the indicators of financial stress by housing status (exhibit 22). A much smaller percentage of renter families have high debt burdens than homeowner families (4 percent compared with 14 percent) but a much higher percentage of renter families have payments past due 60 days or more (19 percent compared with 6 percent). In other words, even though the percentage of renter families with high debt burden is small, they are more likely to be delinquent on their debt than homeowner families.

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