For the last several years, consumer, corporate, and government debt has remained at the highest levels we’ve ever seen, but as bad as this is, America’s economy is facing an even more significant threat.

There’s the debt we know about, which is tracked by calculating the total of credit card, personal and auto loan, and mortgage debt. But there’s also debt we aren’t factoring into that data, which comes in the form of ‘buy now, pay later’ plans — to the tune of a staggering $700 billion.

You may have seen these offers if you’ve shopped online at any major retailer, like Amazon, Best Buy, Target, and even many smaller ones. In fact, an entire cottage industry has sprung up around this model to offer credit that doesn’t appear in consumer credit reports.

While phantom debt is a fraction compared to the $17.69 trillion traditional dollar debt held by U.S. consumers, it’s still a staggering amount that takes a significant chunk out of their household budgets. Worse yet is the fact that, like any other form of debt, if consumers fall behind on their payments, it will be reported to the credit bureaus even though it doesn’t currently show up there, which can have serious implications.

Amanda Webster, COO of the business funding company Fund & Grow, says, “The worst part is consumers don’t understand the true impact this has on them and their ability to borrow. Failure to resolve phantom debt can have a lasting impact on your credit and can take years to overcome. In some cases, you can have long-standing accounts closed, credit limits slashed in half, and worst of all, you can be denied the credit lines you need to survive.”

Obviously, this can quickly spiral out of control, creating a financial house of cards. We should expect to see a lot more of this as wages continue to decline, unemployment grows, and inflation soars.

But consumer debt is just the starting point. As people’s financial situations worsen,  they spend less, meaning businesses lose revenue. That leads to reduced hours and layoffs, pushing even more people into financial struggle, leading to more people spending less. It’s a vicious cycle that ends in economic collapse.

It may be tempting to think, “Well, people should just stop borrowing,” and I’m generally inclined to agree. Still, because of the massive inflation we’ve experienced over the last few years, many are being forced into debt just to cover everyday expenses.

And it doesn’t help matters that our government is piling on debt at an astronomical pace. To put this in perspective, we recently reached a point where the interest payments alone on our national debt now exceed our entire military budget! This is clearly unsustainable.

But back to the phantom debt. I’ve explained how it impacts consumers and their budgets, but there’s another significant factor I haven’t addressed yet. While businesses are offering these ‘buy now, pay later’ programs as a way to recapture some of the revenue they lost due to their customers’ financial struggles, they’re also putting businesses in a precarious position.

That’s because it puts a severe crimp in their cash flow at a time when things are already tight. This is especially true when you consider the business is already on the hook for time, labor, and material costs. Then, add that when a customer defaults, the business loses in multiple ways.

First, they’ve already expended resources but won’t recoup their expenditures. That's a loss at a time when businesses are already struggling. Second, they really have no recourse other than turning it over to collections, where at best, they’ll get pennies on the dollar. This can throw an otherwise great business into a financial tailspin.

The bottom line is this: everyone can see that our economy is in a more precarious position than we’ve seen in our lifetime — but it’s actually far worse than most people realize because we have nearly a billion dollars of phantom debt lurking just beneath the surface. All it will take for a massive collapse is a relatively small percentage of the population to start defaulting, and the entire house of cards will fall.

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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.