Bankruptcy in the US in 2006

For the past two years, I’ve been an avid listener to The Dave Ramsey Show. The financial advice is solid and has encouraged me to change the way I handle money. In just ten months I’ve had a significant swing between being in debt with student loans to actually having cash in the bank and investing in my retirement in my early 20s. In March I paid of my Federal Stafford loans and became completely debt free. Paying off my loans was the culmination of a solid year of working three jobs and going to school full time. I wasn’t sad to part with the money I had earned — writing that check was one of the best things I’ve ever done because not owing anyone a single dime is a wonderful feeling. I didn’t realize how good it would feel until I didn’t have a single debt payment.

While out of college for almost a year now, I live cheaply and reap the benefits of financial freedom. I now part own and work for my own company, Pervasa, and have been there full time since leaving Lockheed Martin in August. I’ve been able to contribute 15% of my income to retirement — including fully maxing out my Roth IRA for 2006 on top of contributions to a 401(k). My six month emergency fund is fully funded and I’m saving for a place of my own so I can stop renting. I don’t worry about how I’m going to pay rent or the electric bill, nor do I worry about being able to travel and have fun. I’m by no means loaded and my income is not high, but I am winning better than I thought possible one year ago.

On Halloween I was listening to the second hour of The Dave Ramsey Show and the topic was bankruptcy. I’ve listened to hundreds of hours of this show, but this was the first bankruptcy theme hour I’ve caught and I was shocked with the bankruptcy statistics Dave was firing off. So shocked, in fact, that I had to verify what he was saying was true.

In 1984, there were 240,000 people who filed bankruptcy. This year it is estimated that over 2,000,000 people will file (keep in mind the fiscal year ended June 30, 2006, and includes filing prior to the new bankruptcy law). That means in 22 years, there has been an 834% increase in the number of filings. I thought, “there’s no way that’s right,” and then I checked a few sources to cross reference the numbers. According to Liz Pulliam Weston, an MSN Money columnist, US courts are now seeing approximately 2,000 new filings per day [1]. Couple that with figures compiled from www.bankruptcyaction.com, some 2,690,000 people (a total of 2,039,214 personal filings) filed by the end of the calendar year 2005 [2, 3].

Is this a surprise? Not really. Americans are falling deeper and deeper into debt — houses, cars, student loans, credit cards — with no end in sight. A May 2006 study by the Center for American Progress showed that in 2005 household debt surpassed household income by 8.4 percent [4]. This means Americans, on average, owe more than 8% more than they earn in any given year. This figure does not include mortgages and as a result, US consumer debt stands at approximately $2.17 trillion [5]. It’s difficult to imagine that much debt but it’s 217 followed by 10 zeros, or $2,170,000,000,000. That’s $7,233 for every man, woman, and child in the United States. Couple that with government deficit levels at about $8.6 trillion and the amount per person becomes ming boggling.

It’s no surprise why so many Americans file for bankruptcy, but who actually files? Deadbeats, the uneducated, the poor? No. According to The Fragile Middle Class: Americans in Debt, by Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, the average age for filing is 38. More single women file than single men at a rate of about 15 to 13. Almost half of the filings are couples. On the whole, those who file are “slightly better educated than the general population.” Greater than 90% have suffered a job loss, divorce, or medical event [3]. During the radio show, Dave Ramsey claims “most have had all three.” When the dust settled, 1 in 60 US households filed for bankruptcy in 2005. Those living in Indiana, Ohio, Utah, Tennessee, and Oklahoma had the worst of it with more than 1 in 40 homes filing chapter 7.

Despite harsher legislation in 2005 (heavily lobbied for by the lending industry), the rate of filings continues to increase. JP Morgan Chase has said the amount it “charges off” would rise to $2.3 billion in the fourth quarter. This is a 44% increase from the same quarter a year ago [6]. Even credit counselors are seeing an increase in the amount of filings. The National Association of Consumer Bankruptcy Attorneys (NACBA) has surveyed 700 members and concludes the law is failing and results are opposite of what was expected. What I heard on the show is backed up from a press release from the NACBA itself [7]:

  1. 68.5% of members said bankruptcy filings are up in the third quarter of 2006 compared to the first half of the year
  2. 57.5% of members now expect filings to reach the same levels as before the law was enacted by the law’s second anniversary in 2007
  3. The primary impact of the new law appears to be more paperwork and higher expenses for cash strapped consumers filing for bankruptcy.
  4. 75% of members said time in preparing a bankruptcy filing has gone up by 50 percent or more
    1. 26.5% said a 50-75 percent increase in time
    2. 23.1% said a 75-100 percent increase in time
    3. 27.1% said a 100 percent or more increase in time
    4. 92.8% agree that the new law simply increases the cost of bankruptcy due to the increased paperwork

Sources:

[1] Weston, Liz Pulliam. “The Bankruptcy Boom is Back.” MSN Money. Link to Article. Archive of Article.

[2] “Bankruptcy Statistics: 1980 to 2006.” BankruptcyAction.com. 28 Aug. 2006. Link to Article. Archive of Article.

[3] Sullivan, Teresa A., Elizabeth Warren, and Jay Lawrence Westbrook. “The Fragile Middle Class: Americans in Debt.” Yale University Press. September 01, 2001.

[4] Weller, Christian E. “Drowning in Debt: America’s Middle Class Falls Deeper in Debt as Income Growth Slows and Costs Climb.” May 2006. Center for American Progress. Link to Article. Archive of Article.

[5] Bennett, Jessica. “Q&A: Why Consumer Debt is Rising.” Newsweek Business – MSNBC.com. 8 Aug. 2006. Link to Article. Archive Pages: 1, 2, 3.

[6] Weston, Liz Pulliam. “Bankruptcy Law Backfires on Credit Card Issuers.” MSN Money. Link to Article. Archive of Article.

[7] “National Association of Consumer Bankruptcy Attorneys (NACBA) Bankruptcy Law Anniversary Survey.” The Hastings Group. 04 Oct. 2006. Link to Article. Archive of Article.

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