Consumer Bankruptcy and Household Debt

Publication Date: August 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

On March 19, 2003, the House passed bankruptcy reform legislation (H.R. 975) that would require some consumer bankruptcy petitioners to repay certain debts rather than have them discharged, or erased, by the bankruptcy court. Similar legislation was passed by both chambers in 2002 but not enacted. The principal impetus behind bankruptcy reform is the high number of consumer bankruptcy filings, which in recent years have been running at over four times the levels of the early 1980s. It is not clear why bankruptcy filings have increased so dramatically during a period that has included two of the longest economic expansions in U.S. history. Since bankruptcy is almost by definition a condition of excessive debt, many would expect to observe 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 been fairly constant over the past two decades. What these aggregate statistics do not show is that the debt burden does not fall equally on all families. Financial distress is most common among lower-income households: in 2001, 27% of families in the bottom fifth of the income distribution had debt service payments that exceeded 40% of their incomes. This suggests that explanations for the rise in consumer bankruptcy filings are more likely to be found in micro-analysis of individuals and groups of debtors than in macroeconomic indicators. This report presents statistics on bankruptcy filings, household debt, and families in financial distress, and will be updated as new statistics become available. For discussion of bankruptcy reform proposals, see CRS Report RL31706, Bankruptcy Reform: A Recap.