ersonal bankruptcies are increasing at what experts call an alarming rate. In 1996 the annual bankruptcy rate passed the 1 million mark for the first time in history. The American Bankruptcy Institute reported that consumers filed a total of 1.1 million bankruptcy petitions, up 29% from the previous year. In other words, one household in 100, or 1%, declared bankruptcy in 1996. Even more alarming, there was a 50% increase in filings in January and February of this year compared to 1996. Why has there been such a dramatic increase in bankruptcies? Experts say it can be attributed to a number of factors, but the primary ones are soaring credit card debt and the fading stigma of bankruptcy.
		n February the Consumer Federation of America released a study showing that consumers charged more than $1 trillion on credit cards in 1996, and one-third of the total was being paid off in installments. It was estimated that credit card debt reached $374 billion to $396 billion by the end of 1996, and 60 million households were carrying credit card balances that averaged $6,000. The Federal Reserve Board said in April that consumer debt is growing faster in 1997 than personal income or consumer spending. Credit card debt increased by $5.1 billion in February at a 12.7% annual rate, a decrease from January's 16-month high $8.4 billion gain at a 21.6% rate.
		xperts maintain that credit card companies, in an intense battle to win cardholders, are making high-limit credit cards more easily accessible to consumers and implementing marketing tactics that reward cardholders who carry balances while penalizing those who pay in full. However, many banks and credit card companies are demonstrating more caution due to the bad consumer debts they have been forced to write off. Recently these institutions have tightened their credit standards, decreased the number of credit card solicitations they mail to consumers, and reduced the amount of credit available to consumers identified as high credit risks.
		nalysts say that the economic recovery has been less than positive for different segments of the population, resulting in increased debt levels. Many individuals who lost their jobs during the recession and later accepted lower-paying jobs during the recovery are still maintaining the same lifestyle-through the use of credit cards. The biggest problem with household debt levels, according to Federal Reserve officials, appears to be among those in the lower-middle to upper-middle income brackets. Wealthy households, defined as those with incomes over $100,000 a year, typically pay off what they owe. Households in the lower-middle to upper-middle income bracket, defined as those with incomes between $50,000 to $100,000 a year, have increased their debt-to-income ratios due to an increased availability of credit. Federal Reserve officials said that between 1992 and 1995, consumer debt ratios for the $50,000 to $100,000 income bracket increased by almost 6% and mortgage ratios by almost 10%. This means that a family whose household income is $65,000 may have added a home equity line of $6,500 (10% of their income) and increased their credit card balance by $3,900 (6%).
		any experts see the soaring increase in personal bankruptcies as a financial survival tool being used by consumers who have run up huge amounts of credit card debt. In the past, consumers typically maintained low balances on their credit cards. If a financial emergency hit, such as a job loss, divorce, or uninsured medical expense, consumers would cut back on expenses or get a second job. Today, more and more consumers turn to credit cards, and incur even greater debt. Experts say that another factor in the increase in bankruptcies is the change in bankruptcy laws last year that allowed consumers to shield more of their personal assets from creditors. As a result, many consumers are using bankruptcy as a financial tool to delay eviction and collection efforts by creditors.
		redit and bank card issuers, who in 1996 took a $6 billion hit in bankruptcy-related charge offs, believe that the bankruptcy laws make it too easy for consumers to declare bankruptcy, walk away from their debt, and start over. Issuers think it should be more difficult for consumers to declare bankruptcy. A coalition of banks and credit card companies that spoke at the congressionally mandated National Bankruptcy Review Commission held last December said, "Today's consumer bankruptcy system unnecessarily harms consumers and creditors alike because of a fundamental flaw-it allows debtors to discharge debts even if the debtors can repay some or all of those debts." This October, the National Bankruptcy Review Commission will reports its recommendations for changing the current bankruptcy laws. As the U.S. Bankruptcy Code currently stands, consumers can choose to file for a Chapter 7 (liquidation of debts) bankruptcy or a Chapter 13 (repayment plan) bankruptcy. Approximately 30% file Chapter 13-the rest file Chapter 7 and walk away from their debts, usually because they are too far in debt to pull themselves out. Even though the Bankruptcy Code is a federal law, consumer rights vary from state to state, with some states discouraging Chapter 13 cases. For example, bankruptcy courts in Los Angeles reject repayment plans unless the consumer can repay 70% or more. The same type of policy exists in New York. And if the consumer falls behind on payments, the courts don't modify the repayment plans to help the consumer succeed. This is due in part to overburdened courts and an effort to avoid Chapter 13's red tape. At the other end of the spectrum, courts in Tennessee and Alabama encourage consumers to settle their debts. Courts may lower payments for a period of time when consumers are unable to maintain the original payment amount. As a result, more debt is repaid, and lower costs get passed along to all consumers.
		ecently there has been an ongoing debate among financial experts over how consumers should be counseled about bankruptcy. Some think that information about bankruptcy is being withheld from consumers, and should be offered as an option, especially when it is in the consumer's best interests. Others believe that consumers should be encouraged to examine other routes, like loan consolidation and credit negotiations. Bankruptcy laws were developed to give consumers who were too deep in debt the opportunity to start over. Experts estimate that the average consumer who files for bankruptcy owes 1.62 times his or her annual income in short-term debt. Bankruptcy usually costs between $500 and $2,000, stops debt collectors, and enables consumers to discharge their debts while keeping major assets, like their homes or cars. The National Foundation for Consumer Credit, an umbrella organization with 1,100 national Consumer Credit Counseling Services offices, says that its average client earns $25,000 a year, owes $19,000 in outstanding credit card and car loan debt, and requires 3 ½ years of credit counseling to pay off their debt. Many factors come into play when trying to determine at what point a consumer should consider bankruptcy. While moral, ethical, and financial factors all figure into the equation, some experts say that time is a major factor. They concur that consumers who are unable to repay their debts within 3 to 5 years should consider bankruptcy. Other experts encourage consumers to look at alternatives, including loan consolidation and credit negotiations. Credit counselors are trained to help consumers negotiate with creditors and develop repayment plans that may include reduced interest rates, the elimination of penalties, and repayment over an agreed upon period of time. The NFCC maintains that consumers come in for credit counseling because they are looking for an alternative to bankruptcy. In 1995, NFCC agencies referred 7% of their 816,000 clients to bankruptcy attorneys, although 82% were technically insolvent and eligible to declare bankruptcy at the time they sought credit counseling. However, the NFCC is required by the Federal Trade Commission to disclose to consumers its dual role: its credit counseling agencies also work for the creditors who are attempting to collect the debts from the overextended consumers seeking credit counseling. There is an incentive for the NFCC agencies to work out repayment plans with consumers-creditors pay the agencies up to 15% for each payment received. Filing for bankruptcy, which can have a negative impact on the creditor but may be a good alternative and in the best interests of the consumer, is typically not an option that the NFCC agencies recommend to consumers.
		iling for bankruptcy will affect a consumer's credit record for up to a decade. Under federal law, bankruptcies remain on a consumer's credit reports for 7 years when they file for Chapter 13 and for 10 years when they file for Chapter 7. The bankruptcy appears on the credit report soon after the consumer files the appropriate papers with the bankruptcy court. The bankruptcy remains on the consumer's credit report even if they later change their mind and withdraw their request to file for bankruptcy or if the judge does not grant the consumer the bankruptcy.
		f you need help repaying creditors, managing debt, or setting up a personal budget, consider obtaining professional help. Consumer Credit Counseling Service offices are located nationwide. For the office nearest you, call toll-free 1 (800) 388-2227.
		Back to CreditCheck Newsletter Index
		Report Express   |   Order Now   |   Members' Home CreditCheck Monitoring Service   |   3-Agency Credit Report Security & Privacy   |   CreditCheck Tools   |   Credit Basics   |   FAQ   |   Contact Us ConsumerInfo.Com® Home Copyright © 2000 ConsumerInfo.Com®, Inc. All Rights Reserved