After a decade of declines, the U.S. Bankruptcy Court for the Western District of New York reported an increase for bankruptcy filings this year through August compared to the same period in 2016. Despite this recent rise, the number of overall bankruptcies remains down compared to a decade ago.
Some of the long-term decline can be attributed to both the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and the Affordable Care Act (ACA), which brought health insurance coverage to 23 million Americans. According to the Kaiser Family Foundation, historically, medical debt was the number one source of personal bankruptcy filings in the U.S. After the ACA bankruptcy filings dropped roughly 50 percent: from 1,536,799 in 2010, to 770,846 in 2016. The decline is also strongly aligned with changes to consumer-lending policies in the banking industry.
Today, however, consumers are facing a number of financial trends that have the potential to push the country toward an increase in bankruptcy filings.
- Recently, the Federal Reserve Bank released a report stating Americans have access to the highest level of revolving credit in history. As of June 2017, collectively, Americans held credit cards offering them $1.021 trillion in revolving credit – the previous record of $1.02 trillion was set in April of 2008.
- In April, according to the Federal Reserve, American consumers owed $1 trillion in credit card debt – a number that was also reached during the fourth quarter of 2016, but which had begun to decrease at the beginning of this year. The Fed stated this number has been climbing since February, 2017.
- Revolving credit has grown at the rate of 4.9 percent annually, with 171 million consumers having access to cards in the first quarter of 2017. That is the highest number since 2005, when 162.5 million people had access to revolving credit.
- The collective total debt of U.S. households (which includes revolving credit, housing, auto loans and student loans) has also surpassed its former record high of $12.68 trillion set in 2008, reaching $12.73 trillion last March.
- According to the New York Federal Reserve, housing-related debt is down almost $1 trillion since it peaked in 2008; but auto loans are $367 billion higher, and student loans are $671 billion higher.
- Auto debt, which often has high interest rates and is not as regulated as home mortgages, is becoming a concern as the number of subprime auto loans in delinquency hit the highest level since 2010. In December of 2016 nearly 6 million borrowers were at least 90 days late.
- The New York Federal Reserve reports debt delinquencies of 90 days or more have improved since 2008, with the exception of student loan debt. Approximately 10 percent of student loans are 90 days or more past due.
- Older Americans are taking on more debt: during the fourth quarter of 2016 those age 60 and over held 22 percent of household debt compared with 15.9 percent in 2008. Nearly 2 million consumers aged 50 to 64 took out “Parent PLUS” loans in 2015 to help college students, up from 1 million 10 years previously.
There is a difference in the profile of borrowers since we saw bankruptcy filings peak in the early 2000’s. More older Americans hold high credit card and auto loan debts, while the levels for those below age 59 have fallen – likely due to the tightening of lending standards since the recession. Older citizens are more creditworthy. In general, those with high credit scores (above 760) hold 41.3 percent of debt, while those with lower scores (below 620), held 13.2 percent of debt at the end of 2016. Comparable numbers in 2008 were 33.9 percent for high scorers and 19 percent for low scorers.
For the average worker, wages have been stagnant for the last 10 to 15 years, while the costs of big-ticket items like cars have continued to rise – and the majority of Americans have less than $5,000 in savings, putting most workers just one emergency away from financial ruin. A perfect storm is forming, and if the current trends don’t change course, eventually we will see the results in our bankruptcy courts.