Debt owed to family and friends

Misery loves company or the saying goes. In the current recession, it is more accurate to say that misery creates business. Millions of households are battling the onslaught of growing health care risks, rising childcare costs and a deep recession with massive job losses. Many of them borrow money from family and friends to help pay for their daily expenses.

Some people may have expected that these economic hardships would pass fairly quickly and that they would be able to repay any borrowed money. Still, things likely won’t improve anytime soon, as the recession lingers, virus cases rise, the job market slows, and the federal government offers only limited help. Families will struggle to repay the money they have borrowed from family and friends. Their economic pain could then spread through communities, with their misery multiplying in families and neighborhoods.

Families are desperate in an economy where their finances are under daily attack. The total number of jobs is still 9.8 million lower than it was in February, before the pandemic took its toll. The pace of job growth has slowed as virus cases have spiked across the country. Many layoffs have become permanent and long-term unemployment is on the rise again. At the same time, families are facing higher health care costs as the novel coronavirus has cut a path of physical devastation through families and communities. Childcare costs have also risen for families as child care centers closed and schools moved to remote learning.

Federal government assistance has been insufficient to meet the many needs of millions of families. Congress enacted the CARES Act in March 2020, providing one-time payments to families and expanding unemployment insurance benefits to those who were laid off at the start of the pandemic. But the recession lasted longer than government benefits. Additional unemployment controls ended in July as the labor market recovery slowed. And congressional action in December 2020 to provide more financial assistance for families fell short of what people really needed.

Families increasingly borrowed money just to pay their bills. Often families and friends provided this extra money. Calculations based on census data show that 13.1% of all families borrowed money from family and friends to pay for daily expenses in November, up from 11.4% in August 2020. differences are much greater among black and Latino families, young families, and those without a college degree. For example, 24.6% of families without a high school diploma borrowed money from family and friends to pay their bills. Families relied on loved ones for help because they had no savings and banks had tightened their own lending standards. With nowhere to go, families in need reached out to their loved ones to get by.

This aid was often not enough for families to avoid disaster. The overwhelming majority of families who received help from family and friends to cover their regular expenses still struggled to pay their bills. More than four out of five households that borrowed from family and friends from August to November this year struggled to pay for expenses such as food, housing, medical care, among others. In comparison, only 24.5% of families who did not borrow from loved ones had difficulty with their expenses. Borrowing money from family and friends is probably a decision made out of desperation and for many families it is not enough.

For many people, borrowing money may not even be enough to ensure they can stay in their homes during the raging pandemic. About a third of renters who borrowed money from friends and family were past due on their rent from August to November 2020. Almost all of these renters, 87.3%, expected to be deported within the next two months. Similarly, a third of homeowners who had received money from friends and family were behind on their mortgage payments. Three quarters, 75.6%, of these owners also expected to be foreclosed within two months. Financial help from family and friends is an important lifeline in these desperate times, but families still fall short.

The reverse is then also true. Families who have borrowed from relatives and friends will struggle to repay that debt. Their own financial difficulties will translate into less financial security for members of their networks. Federal Reserve data provides information on who has financially supported family members and friends in the past. In other words, calculations based on this data show where the money is coming from. In 2019, 14.5% of households financially supported family and friends in 2019 with an average amount of $9,337 that year. That totaled about $173 billion in payments between family and friends that year, as unemployment was low and incomes rose. Even a small portion of that support during the pandemic could end up totaling tens of billions, which most families will struggle to repay in the near future.

When families can’t repay what they borrowed to make ends meet, their financial hardship also hurts the financial security of friends and family, who have helped them through desperate times. Often, these families are themselves in a precarious financial situation. Federal Reserve data shows that a quarter of families who financially supported others in 2019 had less than $37,670 in income that year. Yet they gave their relatives and friends an average amount of more than $3,000. Many of those who helped others during the pandemic could also find themselves in a difficult situation. The misery associated with the pandemic and recession will multiply among families who could least afford the added financial insecurity.

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