Who has "bad credit" when a million Americans file for bankruptcy?

by reader Noni Mausa

Who has “bad credit” when a million Americans file for bankruptcy?

With the air hissing out of the Bush balloon, the ½ to 1 million a year personal bankruptcies for the past decade will certainly not slow down. And the kinds of causes aren’t the sort people will easily be able to restructure their way out of.

The result will be an increase in the numbers of people who have a poor credit rating due to outside events – many of them, like this couple, who soberly did everything right.

That article, from the Belleville News-Democrat, goes on to say, in part:

In November, 100,000 U.S. consumers filed for personal bankruptcy. More than 32 percent of them filed under Chapter 13, which allows debtors to restructure and repay creditors over 36 to 60 months. That’s slightly fewer than the total filings recorded in October but more than 39 percent higher than the number reported in November 2007.

This is happening after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, a law enacted in October 2005 to make it more difficult for consumers to file for Chapter 7 bankruptcy, under which most debts are forgiven.

Immediately after the law went into effect, the American Bankruptcy Institute reported consumer bankruptcies dropped from the 2 million reported in 2005 to 617,000 in 2006. The institute, which provides Congress and the public with analysis of bankruptcy issues, has since recorded that total bankruptcies have jumped to more than 850,000 last year and is on pace to exceed 1 million new cases this year.

Also in 2005, researchers at Harvard University completed a study that found that 50 percent of all bankruptcy filings were partly the result of medical expenses. The average out-of-pocket medical debt for those who filed for bankruptcy was $12,000 and that 68 percent of those who filed for bankruptcy had health insurance. The study concluded that every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem.

Well, we have been discussing aspects of this problem for quite some time now, but it raises a question in my mind: what sort of economy can serve millions and millions of people with a crappy credit rating.

(Rdan…also see stormy’s post here)

And not just the poor, whose credit is dickey at the best of times. From the same article:

Bankruptcy attorney Bill Mueller .. also has seen a shift in clientele. Once upon a time, bankruptcy was primarily a choice for the poor. Today, he said he has filed for clients from every economic status level.

“I’ve filed for members of the military, ranking officers, clergy, lawyers, doctors and people who make a large income who are still above what they can handle,” he said. “We have some with six-figure incomes.”

Although the new law intended to tighten Chapter 7 regulations, Wulff said he is seeing a rise in Chapter 7 filings versus Chapter 13 filings. He said that before the collapse of the real estate market and credit crisis, about half of the cases had filed under Chapter 7. “Now, with equity no longer in their houses to save, what they are doing is throwing in the towel and filing Chapter 7 and surrendering the house,” he said.

I don’t know how long it takes for people’s credit ratings to grow back – is it still seven years? Meanwhile, a poor credit rating can lose the bankrupt person home and car loans, and interfere with securing new jobs, especially in a tight job market..

How many people are we looking at (Dan here…link to Bankruptcy Action deleted at their request 2/25/2014)?

Year Non-Business

2008 1,004,342

2007 822,950

2006 597,965

2005 2,039,214

2004 1,563,145

2003 1,625,208

2002 1,539,111

Or 9.2 million bankruptcies in the past seven years.

Is this a serious problem? That’s about 5% of working age Americans. Presently about 1.2% of working age Americans are filing each year.

Their debtors suffer, of course, but the filers are crippled by the event, too. And crippled people don’t make good workers or good citizens.

I fiddled a bit with a chart from here, adding the post-2000 numbers (didn’t have 2001 so it is pinked in).

I have more questions and no answers regarding this topic.

For instance, in 2006, ’07 and ’08, what did the million or so people do, who would have previously declared bankruptcy (if my projection is correct)?

What happened in 1980 to begin such a long steady climb in bankruptcies? Such a stable increase points to a systemic cause, I would think.

And what will America do if it’s the norm rather than a rare exception to have a bankruptcy in your past? What are those 5% doing now? Can their bankruptcies be labeled “Bush years” and prorated?

by Noni Mausa

Comments (1) | |