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Posted by: Erik Clark
Although bankruptcy filings have been trending downward for years, household debt is expected to hit a new record in 2017.
It may seem like a big number, but fewer than 800,000 people filed for bankruptcy in the U.S. last year. Just six years ago, that amount was double.
Will household debt start to catch up with us? According to the Federal Reserve — maybe.
Household debt climbed to $12.58 trillion in 2016, which nearly broke the 2008 record (see: timing with the Great Recession). It could even reach that high, $12.68 trillion, sometime this year.
Banks are extending more debt to households, but fewer people are delinquent on their debt. However, all that debt will have to go somewhere eventually. Could it result in an uptick in bankruptcies in a few years?
What is household debt?
Household debt includes more than just your house. The categories of debt, as measured by a Federal Reserve Bank of New York report, include housing debt, like mortgages, along with non-housing debt: credit cards, student loans, and auto loans. Each saw an increase in 2016, at a total of $460 billion more household debt — the largest increase in a decade.
The boost is in large part because of stronger new extensions of credit, the Federal Reserve says.
Let’s break down each category, and where we’ve seen increases.
Mortgage balances, at $8.48 trillion, make up 67% of household debt. This is an increase of $130 billion from the third quarter of 2016. Balances on home equity lines of credit, now at $473 billion, were roughly flat. Mortgage originations, measured as appearances of new mortgage balances on consumer credit reports, including refinanced mortgages, were at $617 billion — the highest level of originations since the Great Recession began.
The median credit score for mortgage originations increased to 763, with a credit score of 700 and above generally considered good or very good by measuring agencies. Credit scores are used by lenders to determine how likely you will be able to repay your debt, and thus make their decision on whether or not to offer you a loan and what your interest rate or down payment may be. About 58% of new mortgages went to borrowers with credit scores over 760 last year, an increase of 4 percentage points over 2015.
The percentage of people buying homes with low credit scores, peaking in 2009, has been on the decline in recent years as the mortgage industry is continuing to recover. Consumers, it seems, have been buckling down and being more responsible with their spending — mortgage charge-off rates are within the range observed prior to the recession.
However, about 79,000 people had a new foreclosure notation on their credit reports sometime in the fourth quarter of 2016.
Credit card debt may seem like the most popular to people who have a lot of it and don’t own a home, but it accounts for the least amount of household debt out of all categories — at just 6%. However, credit card debt increased by $32 billion last year, to amount to a total of $779 billion. The aggregate credit card limit also increased for the 16th consecutive quarter, climbing 2.3%.
Student loans account for 10% of household debt. Debt balances rose by $31 billion in the fourth quarter to a total of $1.31 trillion. Most of us know the pain of student loan debt all too well, and unfortunately, if people ever get in trouble with their debt, they’ll most likely still be on the hook for their student loans. It’s really difficult to discharge student loans in a bankruptcy — next to impossible, actually.
Finally, auto loans account for 9% of household debt. New auto loan originations have climbed to a record high, increasing by $22 billion. There were $142 billion in auto loan originations in the fourth quarter, in turn making 2016 the highest auto loan origination year in nearly 20 years.
Like people taking out their first mortgage or refinancing one, auto loan borrowers had an increased median credit score last year in the “good” range — 700. Although they didn’t see as much of an increase as home buyers, 32% of people getting an auto loan in the fourth quarter of 2016 had a credit score of over 760, compared to the previous three quarters’ 29% with that high of a score.
How delinquent are Americans on debt?
According to the Federal Reserve report, while more Americans are racking up household debt, it seems that they’re learning how to pay it back — or at least deal with it for now. Fewer delinquencies were reported at the end of 2016 than there were in 2008, the last time household debt was so high. Only 4.8% of debts were regarded as delinquent or late in payment at the end of last year, while the third quarter of 2008 showed 8.5% delinquencies.
Delinquency rates are pretty stable, too. The most-improved delinquencies are the 30-days-late balances, while the “severely derogatory” ones — debt that’s at least 90 days late — saw a small uptick in the last quarter of 2016. Unfortunately, of the $607 billion of debt that is delinquent, $412 billion is seriously delinquent.
Additionally, 204,000 consumers had a bankruptcy notation added to their credit reports in the final quarter of 2016, which was about 4% fewer than at the same time the previous year — and also a new series low.
Other debt trends for 2017
In addition to major increases in household debt, the restructuring industry also is expecting changes for 2017. The restructuring industry includes law firms, investment banks, lenders, and more who deal with companies who are restructuring their debt through bankruptcy or other means.
While consumer bankruptcies are down, commercial bankruptcies are up. According to the American Bankruptcy Institute, total filings increased by 26% in 2016 over the previous year — the first rise since 2010. Industry experts thus are expecting more companies in debt to attempt to restructure this year. That includes a lot of retailers, many of which filed bankruptcy in 2016 (American Apparel, Sports Authority, Wet Seal, and Hancock Fabrics, to name a few).
So, how do I get out of debt?
There are several ways to get out of debt, starting with getting in control of your finances. You can tighten your budget, get a second job, or you can file for bankruptcy. Chapter 7 bankruptcy, in which you liquidate your assets, is one of the most popular ways to file — and filers actually get to keep most, if not all, of their property. People also can file for Chapter 13 bankruptcy if they have the ability to repay most of their debts, and they do so on a 3- to 5-year plan.
Bankruptcy isn’t as easy as it sounds, though. It can be confusing, and while some people choose to file themselves without the help of an attorney (called “pro se”) to save a few bucks, they aren’t very successful and end up spending more money in the long run. You’re most likely to win your bankruptcy case if you have an experienced bankruptcy lawyer on your side. Consult with any of the forum’s attorney members for a free debt consultation today.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.