Back in October, the media was awash in reports, expressed in stunned amazement, that huge throngs of working Americans were rushing to the courthouse to file for bankrupcty to escape the new rules that would take effect on October 17th. It shouldn't have been surprising--people are spending 1.22 for every dollar they earn and their personal debt is twice what it was just ten years ago. In fact, this year, 2,010,567 people have filed for bankruptcy, which The New York Times reports, is a modern record--600,000 did so just in the two-week period leading up to October 17th.
Which bring me to the leeches of the credit card industry. The New York Times carries a front-page story today entitled "Newly Bankrupt Raking In Piles of Credit Offers." (registration required). Turns out that the industry, now armed with a law that makes it harder for consumers to escape debt, is trying to hook people on even more credit cards, sending out solicitations to people who have just filed for bankruptcy.
So, we are clear: people don't get into debt because they are buying luxury items. As Demos, a think-tank run by my friend Miles Rappaport, found in a study on debt:
- Seven out of 10 low- and middle-income households reported using their credit cardsas a safety net--relying on credit to pay for car repairs, basic living expenses, medical expenses or house repairs.
- One out of three households reported using credit cards to cover basic living expenses on average four out of the last 12 months; households that reported a recent job loss or unemployment, andthose without health insurance in the last three years, were almost twice as likely to use credit cards for basic living expenses.
- 20 percent of survey homeowners had paid off some credit card debt with a mortgage refinance in the last three years, reducing their home equity $12,000 on average. Further, these households still had average credit card debt over $14,000. As a result, they were carrying 18% more debt than homeowners who had refinanced a mortgage but not paid down credit card debt--even though their incomes were almost identical. In other words, they were trading unsecured credit card debt for higher mortgage debt secured by their home.
Here are the two points to remember. First, the pro- credit card industry bill passed with support from Democratic party representatives--so it's no wonder that average Americans don't hold the Democratic Party in much higher regard than the Republicans. Second, the crushing debt middle-class people are carrying is one reason I believe the economy is quite shaky. Government statistics that show economic "activity" do not reveal how difficult it is for most Americans, who aren't seeing bigger paychecks, to pay the bills, without sinking into deeper debt.
At some point, this house of cards may crumble in a loud crash that will leave a lot of people hurting.