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Millions More Consumers Could Be Bankrupt

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How many consumers are actually bankrupt? According to projections within the latest research from the New York Fed, many more consumers could be bankrupt than statistics show.

In 2011, according to statistics released by U.S. courts, there were 1,571,183 bankruptcies. In 2009 and 2010 there were 1,202,395 and 1,531,997 bankruptcies respectively.

But these numbers may underestimate the reality of consumer bankruptcies: many more consumers could be bankrupt but unable to declare bankruptcy because of the 2005 bankruptcy law changes that make filing more complicated and difficult. Just look at the chart below, created by New York Fed researcher Donald P. Morgan. He writes, “The model predicts filings should have accelerated in response to contracting income but, in fact, they basically leveled off and eventually contracted.” 

The story told by the chart is simple: without the 2005 bankruptcy law, which makes it harder for the consumer to file for bankruptcy, the U.S. bankruptcy rate would be as much as six times higher than it is. Currently the bankruptcy rate is slightly higher than 2 fillings per 1000 households; it would be closer to as many as 12 filings per 1000 without the law. Without the 2005 bankruptcy code changes, the number of bankruptcies could have reached as many as 7, 214, 370 million in 2009; 9,191,982 in 2010 and 9,427,098 last year.

Whether the true bankruptcy levels are that high remains unknown, but one thing is certain, there are millions of consumers who are bankrupt but can’t file bankruptcy because the bankruptcy law makes that too complicated and too costly for them. 

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About A. Jurek

A. Jurek is one of the editors at Blogcritics. Contact me at: a.jurek@blogcritics.org
  • Glenn Contrarian

    That’s interesting – I didn’t know that. It’s particularly tragic since many of those who are effectively bankrupt are homeowners who can’t sell their homes since they owe more on their houses than the assessed value thanks to the Great Recession. That was our situation, but we were able to declare bankruptcy and our home was foreclosed without further financial hardship to us.

    But if we could not have declared bankruptcy, I don’t know what we could have done, for we already had creditors filing legal proceedings against us and things would have been very difficult indeed. We got lucky.

  • Kenn Jacobine

    “they owe more on their houses than the assessed value thanks to the Great Recession.”

    You mean because of the Fed’s easy money fake housing boom of the 2000s.

  • Glenn Contrarian

    Don’t be simplistic, Kenn. You may hate regulation, but it wasn’t any regulation that enabled the Great Recession – it was the lack of it, thanks to Clinton’s repeal of Glass-Steagal which allowed banks to essentially gamble with their deposits, without any real limitation on what kind or how many bets (for lack of a better word) they would make.

    The crux of the matter lay in how they could slice apart and sell mortgages that they already figured would turn bad – it’s the old strategy of “privatize the profits, but publicize the loss”. Under Glass-Steagal, AIG et al would not have been able to make such wild gambles and would have been forced to be able to cover mortgage insurance claims before they issued the policies.

    Conservatives like to lay the blame on Fannie and Freddie and they do deserve some of the blame – but the majority of the blame lay with the lack of regulation caused by the repeal of Glass Steagal.

  • Igor

    FNMA was formed by the Roosevelt administration to provide a secondary market in mortgages. What that meant was that banks who had loaned money to homeowners (thus putting their financial assets to work in the housing market, in exchange for periodic payments from mortgage holders, thereby eventually replenishing their funds available for loans) could realize advance money so that they could create more loans. The entire USA banking and financial industry refused to provide this service, so it fell upon the government (as usual, the government had to ride to the rescue of poorly run business) to provide secondary markets.

    FNMA used a market to provide a benefit to families and homeowners.

    FNMA was financed entirely by USA taxpayers and operated by the US government.

    Thus was FNMA born. Their charter demanded that they be prudent and that they make a small annual profit. FNMA was administered by government bureaucrats who had no vested interest in banks or mortgages and could be expected to be prudent and fair.

    That small annual profit was viewed with envy by financiers as it became obvious that secondary markets worked and produced more sales and more cash flow all around. So they insisted that congress allow private parties to participate in the profits by buying shares in FNMA.

    It was a short step from being Silent Shareholders to being voting shareholders, and private bankers started to replace government bureaucrats in management.

    LBJ privatised FNMA in the 60’s to get it out of his hair. So management attention turned from providing good solid mortgages to turning more profits, and, more importantly, big executive salaries and bonuses.

    You can see how we got to where we are, driven by the avarice and greed that so many people cherish.

  • Kenn Jacobine

    Glass-steagal regulated commercial banks. AIG, Bear, Lehman Brothers were insurance companies and investment houses not under the jurisdiction of Glass-Steagal.

  • Igor

    The conversion of FNMA from government agency to private business is an example of failed privatisation.

    And that’s just one of many examples of privatisation failure.

  • Igor

    Glass-Steagal barred investment banks from using savers savings as gambling money. Sounds like a good idea to me. And so it was. For the 60 years it was in place.

    AIG, etc., were insurance companies and were therefore barred from federal regulation by the 1945 McCarran-Ferguson bill. Thus, only weak state regulations applied. That’s why your auto insurance is so high.

    Credit Default Swaps were designed to evade weak state regulation by simply NOT being called insurance. Thus, no money reserves being required means that when a policy holder files a claim they simply say “sorry. no money available”.

    That’s why many financial experts say that ALL parties to any CDS are knowing conspirators in a fraud.