For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20777 ------------------------------------------------------------------------------ Order Code RS20777 Updated October 22, 2008 Consumer Bankruptcy and Household Debt Mark Jickling Government and Finance Division Summary The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA, P.L. 109-8) included the most significant amendments to consumer bankruptcy procedures since the 1970s. The 110th Congress continues to monitor the impact of the new law on debtors and creditors. Bankruptcy reform was enacted in response to the high number of consumer bankruptcy filings, which in 2005 and 2006 reached five times the level of the early 1980s. Why did filings increase so dramatically during a period that included two of the longest economic expansions in U.S. history? Because bankruptcy is by definition a condition of excessive debt, many would expect to see a corresponding increase in the debt burden of U.S. households over the same period. However, while household debt has indeed grown, debt costs as a percentage of income have risen only moderately. What aggregate statistics do not show is that the debt burden does not fall equally on all families. Financial distress is common among lower-income households: in 2004, 27% of families in the bottom fifth of the income distribution spent more than 40% of their income to repay debt. This report presents statistics on bankruptcy filings, household debt, and families in financial distress, and it will be updated as new statistics become available. This report presents data on bankruptcy filings, household debt, and families in financial distress. Table 1 shows filings since 1980. Business filings peaked in 1987 and have since declined, but the number of consumer filings continued to grow through 2005. In 2005, the number of filings surpassed 2 million -- there was a "rush to the courthouse" before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect in October 2005. In 2006, filings dropped sharply, suggesting that the new law caused many to accelerate their filings, and that many petitions that would have been filed in 2006 (or later) were pushed forward by bankruptcy reform. Whether (or how much) BAPCPA will reduce filings in the long run is still unclear. Filings have risen steadily from the 2006 lows, and in the second quarter of 2008 reached 266,667, or over 1 million at an annual rate. Weakening credit market and macroeconomic conditions in could produce further increases. CRS-2 Table 1. Bankruptcy Filings in the United States, 1980-2008 Nonbusiness or Consumer Filings Total Filings Business Filings Year % Change from Filings Per 1,000 (number) (number) Number Previous Year Population 1980 331,264 43,694 287,570 46.0 1.26 1981 363,943 48,125 315,818 9.8 1.37 1982 380,251 69,300 310,951 -1.5 1.34 1983 348,880 62,436 286,444 -7.9 1.22 1984 348,521 64,004 284,517 -0.7 1.20 1985 412,510 71,277 341,233 19.9 1.43 1986 530,438 81,235 449,203 31.6 1.87 1987 577,999 82,446 495,553 10.3 2.04 1988 613,465 63,853 549,612 10.9 2.24 1989 679,461 63,235 616,226 12.1 2.49 1990 782,960 64,853 718,107 16.5 2.87 1991 943,987 71,549 872,438 21.5 3.45 1992 971,517 70,643 900,874 3.3 3.53 1993 875,202 62,304 812,898 -9.8 3.15 1994 832,829 52,374 780,455 -4.0 2.99 1995 926,601 51,959 874,642 12.1 3.33 1996 1,178,555 53,549 1,125,006 28.6 4.24 1997 1,404,145 54,027 1,350,118 20.0 5.02 1998 1,442,549 44,367 1,398,182 3.6 5.17 1999 1,319,465 37,844 1,281,581 -8.3 4.68 2000 1,253,444 35,472 1,217,972 -5.0 4.54 2001 1,492,129 40,099 1,452,030 19.2 5.10 2002 1,577,651 38,540 1,539,111 6.0 5.33 2003 1,660,245 35,037 1,625,208 5.6 5.59 2004 1,597,462 34,317 1,563,145 -3.8 5.32 2005 2,078,415 39,201 2,039,214 30.5 6.92 2006 617,660 19,695 597,965 -70.6 1.98 2007 850,912 28,322 822,590 37.6 2.74 2008a 522,205 18,456 503,749 28.4 3.10 Source: Administrative Office of the U.S. Courts. a. Figures for 2008 are first half; rates are for the 12-months ending June 30, 2008, compared with the previous 12-month period. CRS-3 Table 2. Household Debt Levels and Debt Burden, 1990-2008 Consumer Credit Home Mortgage Debt Debt as % Debt Burden ($ billions) ($ billions) of (% of Income Year Disposable Non- Home Equity Used for Debt Revolving Total Total Personal revolving Loans Payments) Income 1990 238.6 569.6 808.2 214.7 2,502.5 11.98 76.1 1991 263.8 534.3 798.1 222.0 2,681.2 11.53 76.6 1992 278.4 527.7 806.1 217.1 2,852.9 10.80 75.1 1993 309.9 555.7 865.6 210.4 3,007.8 10.80 77.1 1994 365.6 631.6 997.2 221.8 3,173.7 11.17 78.8 1995 443.5 697.5 1,141.0 237.5 3,327.9 11.86 81.6 1996 499.6 743.2 1,242.8 262.6 3,534.8 12.12 84.0 1997 536.7 783.3 1,320.0 297.0 3,752.8 12.11 84.7 1998 576.5 839.3 1,415.8 309.9 4,054.0 12.07 85.5 1999 604.5 923.6 1,528.1 334.3 4,431.0 12.41 89.0 2000 675.7 1,028.9 1,704.6 407.3 4,808.3 12.89 90.5 2001 741.7 1,127.3 1,869.0 439.0 5,292.9 13.39 95.7 2002 762.8 1,189.9 1,952.7 500.7 6,036.2 13.57 102.0 2003 781.6 1,252.8 2,034.4 593.4 6,887.1 13.55 109.2 2004 810.1 1,310.4 2,120.5 775.6 7,845.4 13.57 115.0 2005 829.2 1,348.0 2,177.2 914.9 8,875.7 14.10 120.0 2006 880.1 1,520.0 2,400.1 1,065.8 9,872.9 14.42 124.8 2007 940.6 1,583.0 2,523.6 1,129.2 10,542.7 14.39 128.1 a 2008 965.6 1,614.4 2,580.0 1,128.0 10,639.9 13.85 122.0 Sources: (1) Federal Reserve, Release G. 19, Consumer Credit; Release Z.1, Flow of Funds Accounts, Table L. 218, Household Mortgage Debt; Household Debt Service Obligation Ratios, DSR. (2) Bureau of Economic Analysis, Personal Income & Outlays, Table 2. a. Figures for 2008 are for the end of the second quarter. Table 2 shows figures on household debt. The major categories of household debt are mortgage debt and consumer credit, which together comprise about 97% of all household indebtedness. Consumer credit consists of (1) revolving credit, or credit card debt, and (2) non-revolving debt, which is dominated by auto loans (though it also includes loans for boats, mobile homes, vacations, and so on). Mortgage debt is borrowing secured by real estate. A subcategory within mortgage debt, home equity lending, is broken out in the table because it may substitute for consumer credit in many cases. Table 2 also includes Federal Reserve estimates of the burden of debt service, that is, the percentage of household disposable income that goes to repay loans. Over the past decade, the rise in this measure has been steady, but not dramatic. The debt burden figures in Table 2 fluctuate within a fairly narrow range: from 10.80% to 14.42%. (During the CRS-4 1980s, the range was similar: from 10.6% to12.5%.) Although the burden of debt has risen since the 1980s, particularly since 2001, the increase has been gradual and would not appear to explain much of the fivefold increase in personal bankruptcy filings over the past two decades. Interest rates paid by consumers -- particularly mortgage rates -- declined in recent years to the lowest levels since the 1950s, and they remain low. The relative stability of the debt burden in the face of falling and historically low interest rates implies that the ratio of debt outstanding to income has been rising. This ratio -- the sum of consumer and mortgage debt shown in the table expressed as a percentage of disposable personal income -- is shown in the far right column of Table 2. The increases in this figure, which since 1990 has risen more than twice as fast as the debt burden, suggest that further increases in bankruptcy filings (and perhaps problems for lenders) may lie ahead if interest rates should rise suddenly or unexpectedly. Many homeowners face resets on their adjustable-rate mortgages, with possible increases in their mortgage payments, but the prevalence of fixed-rate mortgages may mitigate this effect at the national level.1 For the present, however, historically low interest rates have permitted households to take on more debt without a major increase in the debt burden. Table 3. Percentage of Families in Financial Distress by Income Level, 1995-2004 Percentile of Income 1995 1998 2001 2004 Distribution All families 11.7 13.6 11.8 12.2 Below 20 27.5 29.9 29.3 27.0 20-39.9 18.0 18.3 16.6 18.6 40-59.9 9.9 15.8 12.3 13.7 60-79.9 7.7 9.8 6.5 7.1 80-89.9 4.7 3.5 3.5 2.4 90-100 2.3 2.8 2.0 1.8 Source: Federal Reserve, Survey of Consumer Finances, in: Federal Reserve Bulletin, February 2006. Note: Families in "financial distress" are those devoting over 40% of their incomes to debt repayment. The aggregate household debt numbers mask important differences among families: some have done very well in the long booms of the 1980s and 1990s, while others have taken on debt that they have difficulty repaying. Table 3 above, based on the Federal 1 Since 1990, about three-quarters of mortgages have been fixed-rate loans. For information on the recent increase in mortgage foreclosures, see CRS Report RL34232, Understanding Mortgage Foreclosure: Recent Events, the Process, and Costs, by Darryl E. Getter. CRS-5 Reserve's Survey of Consumer Finances, shows the percentage of families at various income levels who devote more than 40% of their incomes to debt service, for selected years from 1995 through 2004. Two noteworthy facts emerge from the data in Table 3. First is the high rate of distress among lower-income families, who are the most likely to file for bankruptcy.2 Second, like the debt burden figures shown in Table 2, there is no sharply rising trend that would explain the dramatic increase in personal bankruptcy filings. The percentage of all families in distress in 2004 is little changed from the 1995 level. Consumer bankruptcies in 2004, on the other hand, were up 79% over the 1995 figure. The question remains why so many families at or below the national median income take on high levels of debt and end up in bankruptcy court. Some explanations focus on particularly vulnerable populations: the sick and uninsured (or underinsured), the divorced, or residents of states without mandatory uninsured motorist coverage. Supporters of the bankruptcy reform measure finally enacted in 2005 argued that the bankruptcy code was too debtor-friendly and created an incentive to borrow beyond the ability to repay, or in some cases without the intention of repaying. Opponents of reform claimed that financial distress is often a by-product of the marketing strategies of credit card issuers and other consumer lenders. Lack of a consensus explanation for the rise in consumer bankruptcy filings ensures that the issue will remain controversial. The argument that consumer behavior is affected by the legal regime was given some dramatic support by the rush to file before the new law took effect on October 17, 2005.3 Although the number of filings during 2006 was the lowest in decades, it remains to be seen whether this decline represents the "front-loading" of filings that would otherwise have taken place in 2006 into the period before the new law's effective date. The steady increase in bankruptcy filings since the initial post-BAPCPA drop in 2006 raises questions about how much the Bankruptcy Abuse Prevention and Consumer Protection Act will significantly reduce the number of consumer bankruptcy filings in the long run. 2 In 2007, the median annual income reported by Chapter 7 bankruptcy petitioners (based on average monthly income for the six months prior to filing) was $25,800, just over half of the median household income as reported by the Census. See Administrative Office of the U.S. Courts, "2007 Report of Statistics Required by [BAPCPA]," Table 2A. 3 Timothy Egan, "Newly Bankrupt Raking In Piles Of Credit Offers," New York Times, December 11, 2005, p. A1. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20777