Reference -
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 can’t 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’s 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 individual’s 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 consumer’s 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 won’t 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 we’ll see change
here.
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