Consumer Bankruptcy and Household Debt

Consumer Bankruptcy and Household Debt
Mark Jickling
Government and Finance Division
Summary
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA, P.L. 109-8) included the most significant amendments to consumer
bankruptcy procedures since the 1970s. The 110^th Congress continues to monitor the
impact of the new law on debtors and creditors. Bankruptcy reform was enacted in
response to the high number of consumer bankruptcy filings, which in 2005 and 2006
reached five times the level of the early 1980s. Why did filings increase so dramatically
during a period that included two of the longest economic expansions in U.S. history?
Because bankruptcy is by definition a condition of excessive debt, many would expect
to see a corresponding increase in the debt burden of U.S. households over the same
period. However, while household debt has indeed grown, debt costs as a percentage
of income have risen only moderately. What aggregate statistics do not show is that the
debt burden does not fall equally on all families. Financial distress is common among
lower-income households: in 2004, 27% of families in the bottom fifth of the income
distribution spent more than 40% of their income to repay debt. This report presents
statistics on bankruptcy filings, household debt, and families in financial distress, and
it will be updated as new statistics become available.
This report presents data on bankruptcy filings, household debt, and families in
financial distress. Table 1 shows filings since 1980. Business filings peaked in 1987 and
have since declined, but the number of consumer filings continued to grow through 2005.
In 2005, the number of filings surpassed 2 million — there was a “rush to the courthouse”
before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA) took effect in October 2005. In 2006, filings dropped sharply, suggesting that
the new law caused many to accelerate their filings, and that many petitions that would
have been filed in 2006 (or later) were pushed forward by bankruptcy reform.
Whether (or how much) BAPCPA will reduce filings in the long run is still unclear.
Filings have risen steadily from the 2006 lows, and in the second quarter of 2008 reached
266,667, or over 1 million at an annual rate. Weakening credit market and
macroeconomic conditions in could produce further increases.

Table 1. Bankruptcy Filings in the United States, 1980-2008
^No^{nbusiness o}^r^Co^nsum^{er Filing}^s
^Yea^r^To^t^a^{l Filing}^s⁽^num^ber)^B^u^{siness Filing}^s⁽^num^ber)^%^C^h^an^{ge from}^Filing^s^{Per 1}^,⁰⁰⁰
^Num^b^er^Previous^Year^P^o^pula^t^ioⁿ
¹⁹⁸⁰^331,264^43,694^287,570^46.0¹^.26
¹⁹⁸¹^363,943^48,125^315,818^9.8¹^.37
¹⁹⁸²^380,251^69,300^310,951^-¹^.5^1.34
¹⁹⁸³^348,880^62,436^286,444^-⁷^.9^1.22
¹⁹⁸⁴^348,521^64,004^284,517^-⁰^.7^1.20
¹⁹⁸⁵^412,510^71,277^341,233^19.9¹^.43
¹⁹⁸⁶^530,438^81,235^449,203^31.6¹^.87
¹⁹⁸⁷^577,999^82,446^495,553^10.3²^.04
¹⁹⁸⁸^613,465^63,853^549,612^10.9²^.24
¹⁹⁸⁹^679,461^63,235^616,226^12.1²^.49
¹⁹⁹⁰^782,960^64,853^718,107^16.5²^.87
¹⁹⁹¹^943,987^71,549^872,438^21.5³^.45
¹⁹⁹²^971,517^70,643^900,874^3.3³^.53
¹⁹⁹³^875,202^62,304^812,898^-⁹^.8^3.15
¹⁹⁹⁴^832,829^52,374^780,455^-⁴^.0^2.99
¹⁹⁹⁵^926,601^51,959^874,642^12.1³^.33
¹⁹⁹⁶^1,178,555^53,549^1,125,006^28.6⁴^.24
¹⁹⁹⁷^1,404,145^54,027^1,350,118^20.0⁵^.02
¹⁹⁹⁸^1,442,549^44,367^1,398,182^3.6⁵^.17
¹⁹⁹⁹^1,319,465^37,844^1,281,581^-⁸^.3^4.68
²⁰⁰⁰^1,253,444^35,472^1,217,972^-⁵^.0^4.54
²⁰⁰¹^1,492,129^40,099^1,452,030^19.2⁵^.10
²⁰⁰²^1,577,651^38,540^1,539,111^6.0⁵^.33
²⁰⁰³^1,660,245^35,037^1,625,208^5.6⁵^.59
²⁰⁰⁴^1,597,462^34,317^1,563,145^-³^.8^5.32
²⁰⁰⁵^2,078,415^39,201^2,039,214^30.5⁶^.92
²⁰⁰⁶^617,660^19,695^597,965^-^70.6¹^.98
²⁰⁰⁷^850,912^28,322^822,590^37.6²^.74
²⁰⁰⁸^a^522,205^18,456^503,749^28.4³^.10
^Source:^A^d^mⁱⁿⁱ^s^t^rativ^{e Of}^fⁱ^{ce of}^th^{e U.S. C}^o^u^r^ts^.
^{a. F}ⁱ^g^u^r^es^f^o^{r 2008 are f}ⁱ^rs^t^h^a^l^f^;^rat^e^s^{are f}^o^{r t}^h^{e 12-}^m^oⁿ^t^h^s^en^diⁿ^g^Juⁿ^e^{30, 2008, com}^p^{ared w}ⁱ^t^h^t^h^e
^prevⁱ^o^u^s^12-^m^oⁿ^t^h^peri^od.

Table 2. Household Debt Levels and Debt Burden, 1990-2008
^Cons^um^{er Credit}^Hom^e^M^o^{rtgage D}^e^b^t^{Debt B}^u^rden^{Debt a}^s^%
⁽^$^billio^ns)⁽^$^billio^ns)^{(% of I}ⁿ^com^e^of
^Yea^r^Us^{ed for Debt}^Dⁱ^s^p^os^ab^l^e
^Paym^en^ts⁾^Pers^on^al^Inc^o^m^e^R^e^vol^viⁿ^g^No^n-^revol^viⁿ^g^To^t^a^l^H^o^m^e^Equit^y^L^oan^s^To^t^a^l
¹⁹⁹⁰^238.6^569.6^808.2^214.7²^,502.5^11.98^76.1
¹⁹⁹¹^263.8^534.3^798.1^222.0²^,681.2^11.53^76.6
¹⁹⁹²^278.4^527.7^806.1^217.1²^,852.9^10.80^75.1
¹⁹⁹³^309.9^555.7^865.6^210.4³^,007.8^10.80^77.1
¹⁹⁹⁴^365.6^631.6^997.2^221.8³^,173.7^11.17^78.8
¹⁹⁹⁵^443.5^697.5¹^,141.0^237.5³^,327.9^11.86^81.6
¹⁹⁹⁶^499.6^743.2¹^,242.8^262.6³^,534.8^12.12^84.0
¹⁹⁹⁷^536.7^783.3¹^,320.0^297.0³^,752.8^12.11^84.7
¹⁹⁹⁸^576.5^839.3¹^,415.8^309.9⁴^,054.0^12.07^85.5
¹⁹⁹⁹^604.5^923.6¹^,528.1^334.3⁴^,431.0^12.41^89.0
²⁰⁰⁰^675.7¹^,028.9¹^,704.6^407.3⁴^,808.3^12.89^90.5
²⁰⁰¹^741.7¹^,127.3¹^,869.0^439.0⁵^,292.9^13.39^95.7
²⁰⁰²^762.8¹^,189.9¹^,952.7^500.7⁶^,036.2^13.57^102.0
²⁰⁰³^781.6¹^,252.8²^,034.4^593.4⁶^,887.1^13.55^109.2
²⁰⁰⁴^810.1¹^,310.4²^,120.5^775.6⁷^,845.4^13.57^115.0
²⁰⁰⁵^829.2¹^,348.0²^,177.2^914.9⁸^,875.7^14.10^120.0
²⁰⁰⁶^880.1¹^,520.0²^,400.1¹^,^065.8⁹^,872.9^14.42^124.8
²⁰⁰⁷^940.6¹^,583.0²^,523.6¹^,^129.2^10,542.7^14.39^128.1
²⁰⁰⁸^a^965.6¹^,614.4²^,580.0¹^,^128.0^10,639.9^13.85^122.0
^Sources^:^{(1) Federal R}^e^s^e^rv^{e, R}^e^leas^{e G. 19, C}^oⁿ^s^u^m^{er C}^r^edit;^R^e^l^e^a^s^e^Z^.^{1, Flow}^of^Fuⁿ^d^s^A^ccouⁿ^t^s^,
^T^a^bl^{e L}^.^{218, H}^o^u^s^eh^ol^{d Mort}^g^a^g^e^D^e^bt^;^H^o^u^s^eh^ol^{d D}^e^bt^S^e^rvⁱ^{ce O}^b^lⁱ^g^atⁱ^oⁿ^R^a^tⁱ^o^s^,^D^S^R^.^{(2) Bu}^reau^of
^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^{, Pers}^on^al^In^com^e^&^O^u^t^l^a^y^s^{, T}^a^bl^{e 2.}
^{a. F}ⁱ^g^u^r^es^f^o^{r 2008 are f}^o^{r t}^h^{e en}^{d of}^t^h^{e s}^econ^d^qu^art^e^r.
Table 2 shows figures on household debt. The major categories of household debt
are mortgage debt and consumer credit, which together comprise about 97% of all
household indebtedness. Consumer credit consists of (1) revolving credit, or credit card
debt, and (2) non-revolving debt, which is dominated by auto loans (though it also
includes loans for boats, mobile homes, vacations, and so on). Mortgage debt is
borrowing secured by real estate. A subcategory within mortgage debt, home equity
lending, is broken out in the table because it may substitute for consumer credit in many
cases.
Table 2 also includes Federal Reserve estimates of the burden of debt service, that
is, the percentage of household disposable income that goes to repay loans. Over the past
decade, the rise in this measure has been steady, but not dramatic. The debt burden figures
in Table 2 fluctuate within a fairly narrow range: from 10.80% to 14.42%. (During the

1980s, the range was similar: from 10.6% to12.5%.) Although the burden of debt has
risen since the 1980s, particularly since 2001, the increase has been gradual and would
not appear to explain much of the fivefold increase in personal bankruptcy filings over the
past two decades.
Interest rates paid by consumers — particularly mortgage rates — declined in recent
years to the lowest levels since the 1950s, and they remain low. The relative stability of
the debt burden in the face of falling and historically low interest rates implies that the
ratio of debt outstanding to income has been rising. This ratio — the sum of consumer
and mortgage debt shown in the table expressed as a percentage of disposable personal
income — is shown in the far right column of Table 2. The increases in this figure,
which since 1990 has risen more than twice as fast as the debt burden, suggest that further
increases in bankruptcy filings (and perhaps problems for lenders) may lie ahead if
interest rates should rise suddenly or unexpectedly. Many homeowners face resets on
their adjustable-rate mortgages, with possible increases in their mortgage payments, but
the prevalence of fixed-rate mortgages may mitigate this effect at the national level.¹ For
the present, however, historically low interest rates have permitted households to take on
more debt without a major increase in the debt burden.
Table 3. Percentage of Families in Financial Distress
by Income Level, 1995-2004
Percentile of Income1995199820012004
Distribution
All families11.713.611.812.2
Below 2027.529.929.327.0
20-39.9 18.0 18.3 16.6 18.6
40-59.9 9.9 15.8 12.3 13.7
60-79.9 7.7 9.8 6.5 7.1
80-89.9 4.7 3.5 3.5 2.4
90-100 2.3 2.8 2.0 1.8
^Source:^{Federal R}^e^s^e^rv^{e, Su}^rv^ey^of^C^oⁿ^s^u^m^{er Fin}^aⁿ^ces^{, in}^:^Fed^e^ra^{l Reserve Bu}^lletin^{, F}^e^bru^a^ry^2006.
^No^te:^Fam^{ilies in}^“^fⁱⁿ^an^{cial d}ⁱ^str^e^{ss” ar}^{e th}^o^s^{e d}^e^v^o^tin^g^o^v^er⁴⁰^%^o^f^th^eirⁱⁿ^co^m^e^{s to}^d^e^b^t^r^e^p^a^y^m^en^t.
The aggregate household debt numbers mask important differences among families:
some have done very well in the long booms of the 1980s and 1990s, while others have
taken on debt that they have difficulty repaying. Table 3 above, based on the Federal

¹ Since 1990, about three-quarters of mortgages have been fixed-rate loans. For information on
the recent increase in mortgage foreclosures, see CRS Report RL34232, Understanding
Mortgage Foreclosure: Recent Events, the Process, and Costs, by Darryl E. Getter.

Reserve’s Survey of Consumer Finances, shows the percentage of families at various
income levels who devote more than 40% of their incomes to debt service, for selected
years from 1995 through 2004. Two noteworthy facts emerge from the data in Table 3.
First is the high rate of distress among lower-income families, who are the most likely to
file for bankruptcy.² Second, like the debt burden figures shown in Table 2, there is no
sharply rising trend that would explain the dramatic increase in personal bankruptcy
filings. The percentage of all families in distress in 2004 is little changed from the 1995
level. Consumer bankruptcies in 2004, on the other hand, were up 79% over the 1995
figure.
The question remains why so many families at or below the national median income
take on high levels of debt and end up in bankruptcy court. Some explanations focus on
particularly vulnerable populations: the sick and uninsured (or underinsured), the
divorced, or residents of states without mandatory uninsured motorist coverage.
Supporters of the bankruptcy reform measure finally enacted in 2005 argued that the
bankruptcy code was too debtor-friendly and created an incentive to borrow beyond the
ability to repay, or in some cases without the intention of repaying. Opponents of reform
claimed that financial distress is often a by-product of the marketing strategies of credit
card issuers and other consumer lenders. Lack of a consensus explanation for the rise in
consumer bankruptcy filings ensures that the issue will remain controversial.
The argument that consumer behavior is affected by the legal regime was given some
dramatic support by the rush to file before the new law took effect on October 17, 2005.³
Although the number of filings during 2006 was the lowest in decades, it remains to be
seen whether this decline represents the “front-loading” of filings that would otherwise
have taken place in 2006 into the period before the new law’s effective date. The steady
increase in bankruptcy filings since the initial post-BAPCPA drop in 2006 raises
questions about how much the Bankruptcy Abuse Prevention and Consumer Protection
Act will significantly reduce the number of consumer bankruptcy filings in the long run.

² In 2007, the median annual income reported by Chapter 7 bankruptcy petitioners (based on
average monthly income for the six months prior to filing) was $25,800, just over half of the
median household income as reported by the Census. See Administrative Office of the U.S.
Courts, “2007 Report of Statistics Required by [BAPCPA],” Table 2A.
³ Timothy Egan, “Newly Bankrupt Raking In Piles Of Credit Offers,” New York Times, December

11, 2005, p. A1.