Bankruptcy as a Debt Management Solution: Why Do so Many of Us Have so Much Debt?
In 2004, 1,562,174 Americans sought
protection from creditors through bankruptcy court
a per capita rate over ten times higher than during
the worst years of the Great Depression! According
to the Consumer Federation of America, in 2003 alone
over 9 million consumers made initial calls with a
credit counseling agency and in 2004 close to 2 million
consumers were actually enrolled in varying types
of assistance plans. These numbers clearly indicate
that personal debt in the United States is higher
than it has ever been and financial stress is very
much a reality for millions of Americans, across all
segments of society.
But how did this come to be? The economy
has been relatively strong for over a decade so it
cant be about slow economic cycles. Why are so many
Americans finding it difficult to handle debt loads?
Is bankruptcy the inevitable conclusion for many of
us? All financial experts are in agreement that in
most cases, bankruptcy is not a pre-ordained outcome
if help is sought early. However, given the type of
consumer driven society we live in today, there is
nothing to suggest that the rate of bankruptcies is
going to decline.
IT HAS NEVER BEEN EASIER TO GET CREDIT
Personal debt in this country has now
surpassed the 1.7 trillion dollar mark and continues
to soar. 1995 was the first year American consumers
used credit cards more than cash in the economy and
there has been no looking back. The financial services
sector is an extremely competitive multi-billion dollar
industry and financial institutions are falling over
each other to try and sign consumers up to their credit
services. The average household receives 20 unsolicited
credit card invitations each year and many of these
offers require no credit check, credit history review
or income verification. Today, the average American
family carries 12 different credit card accounts and
we seem to be using them all!
And if it wasn't enough that the financial
services companies are trying to tempt everyone with
credit they might not be able to afford, retailers
have also joined this game. Merchant specific credit
cards were originally introduced as a way to gain
customer loyalty by providing a convenience when shopping
at the same store. As major ticket consumer goods
have risen in price, retailers have had to come up
with innovative ways to keep moving these products.
Advertising no down payments, or no payments for a
full year has appealed to our collective desire to
enjoy today and pay tomorrow. It has allowed retailers
to continue moving their products and whether planned
or not, has resulted in a new cash cow because most
people don't pay off their cards every month. In fact,
88% of all consumers who buy products under deals
where there is a grace period before any payment is
due or interest is charged end up converting and keeping
the amount on their credit cards. At interest rates
of between 20 and 30% for most retail cards, this
has become a very profitable activity for the merchants.
This last point bears further analysis.
Financial institutions and retailers offering credit
terms make an enormous sum of money on interest fees
and late payments. Again, consider the average American
household. The debt carried on those 12 credit cards
equates on average to $8000.00 dollars. According
to VISA, 48% of us cover only minimum payments from
month to month so assume for this example $200. Provided
these cards will not be used again for any additional
purchases and using an average annual interest of
18%, it will take 62 months to pay down this debt
at a total cost of $12,307.37. That is an additional
$4307.37 in interest payments over 5 years or fully
35% of the money paid to clear this debt! No wonder
lenders don't mind minimum monthly payments.
PERSONAL DEBT LEVELS HAVE NEVER BEEN
HIGHER
These developments have had a huge impact
on consumer buying habits. Since 1990 the average
American family debt load has increased by a whopping
46% (figure adjusted for inflation). It is no longer
necessary to save up before buying something; credit
is available for almost anyone and just about everyone
is using it. The advent of the internet is also making
it much easier to spend money. A click of a button,
a credit card number and that new product you happened
to find while surfing is delivered to your door a
couple of days later. You don't even have to get dressed
to go shopping anymore! It has simply never been so
easy to get material products or so challenging to
adhere to the kind of fiscal self-discipline that
is needed to stay out of debt in today's society.
According to the American Bankruptcy
Institute, personal bankruptcy is most often accompanied
by either family breakdown (divorce), unexpected medical
bills or sudden job loss. These are circumstances
largely out of an individuals control, but the primary
difference in today's society is that because the debt
level being carried by most families is so high, there
is no longer any savings for those rainy days. A survey
conducted by MetLife supports this contention with
its findings that fully half of all households in
the United States live from paycheck to paycheck.
If the average family is financially extended like
this, it is no wonder bankruptcy may be the only option
when sudden changes like divorce, medical bills or
job loss occur.
This is no longer a phenomena of one
particular segment of society. No household should
feel ashamed or be under the impression that they
are alone. But in order to safeguard their financial
futures, consumers do need to realize the position
they are putting themselves in and what they need
to do before it becomes too late for anything except
bankruptcy.
If continued spending patterns and money
management habits do not appreciably change, the number
of personal bankruptcies will continue to skyrocket.
And even if this final step may be the only option
for some, financial experts do warn that although
it will serve to either liquidate (Chapter 7 proceeding)
or discharge (Chapter 13 proceeding) debt, the repercussions
will last for at least ten years. Any future credit
will only be available at the highest interest rates,
it may affect approval for insurance policies and
even in job selection. Recent amendments to federal
bankruptcy legislation have now made it much more
difficult to obtain a chapter 7 hearing, so even if
bankruptcy is the chosen option, it may still require
a repayment plan that does not eliminate a consumers
debt obligations. Bankruptcy should not be taken lightly.
Given our consumer society, there is
no indication that these record debt levels are going
to change. It may be harder in future to declare bankruptcy,
but that wont solve the problem. Perhaps what is needed
is a tightening up of the credit approval processes
so consumers don't have such easy access to levels
they cannot possible sustain given income levels.
But as long as lenders continue to earn such high
revenues through interest, late payment fees etc.
it is unlikely well see change here.
Kavar Peter is a successful freelance
writer with a focus in several industries, including
credit
issues, credit
counseling and debt
conso lidation tips and information.
