Consumer Debt Is Consistent With Bankruptcy Filings

Monday, August 10, 2009, 7:37 AM | Leave Comment

Research by the Federal Reserve indicates that household debt is at a record high relative to disposable income. Some analysts are concerned that this unprecedented level of debt might pose a risk to the financial health of American households.

A high level of indebtedness among households could lead to increased household delinquencies and bankruptcies, which could threaten the health of lenders if loan losses are greater than anticipated.

Total filings reached 126,434 in July, a 34.3% increase from the same period a year ago and an 8.7% increase over June, according to a report released Tuesday from the the American Bankruptcy Institute.

The number of filings was the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect in October 2005.

Moral of the story
Without a job, consumers are hard pressed to pay their bills as their debt climbs. The unemployment rate currently stands at 9.5%, a 26-year high. And the job market doesn’t look to be improving anytime soon.

Of the bankruptcy filings in July, 28.3% were Chapter 13 cases where the consumer in financial trouble sets up a payment plan to get caught up on the debts. In a Chapter 7 bankruptcy filing, which is more common, most of a consumer’s debt is relieved from any further obligation and is basically forgiven.

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