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Thread: personal bankruptcy rate skyrocketing even if still employed

  1. #1
    Banned Melonie's Avatar
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    Default personal bankruptcy rate skyrocketing even if still employed

    (snip)"March 2010 saw 158,000 bankruptcy filings. David Rosenberg of Gluskin-Sheff notes that this is an astounding 6,900 filings per day.

    This latest filing is up 19% from March 2009’s number which occurred at the absolute nadir of the economic decline, when everyone thought the world was ending. It’s also up 35% from last month’s (February 2010) number.

    Given the significance of this, I thought today we’d spend some time delving into numbers for the “median” American’s experience in the US today. Regrettably, much of the data is not up to date so we’ve got to go by 2008 numbers.

    In 2008, the median US household income was $50,300. Assuming that the person filing is the “head of household” and has two children (dependents), this means a 1040 tax bill of $4,100, which leaves about $45K in income after taxes (we’re not bothering with state taxes). I realize this is a simplistic calculation, but it’s a decent proxy for income in the US in 2008.

    Now, $45K in income spread out over 26 pay periods (every two weeks), means a bi-weekly paycheck of $1,730 and monthly income of $3,460. This is the money “Joe America” and his family to live off of in 2008.

    Now, in 2008, the median home value was roughly $225K. Assuming our “median” household put down 20% on their home (unlikely, but it used to be considered the norm), this means a $180K mortgage. Using a 5.5% fixed rate 30-year mortgage, this means Joe America’s 2008 monthly mortgage payments were roughly $1,022.

    So, right off the bat, Joe’s monthly income is cut to $2,438.

    According to the US Department of Agriculture, the average 2008 monthly food bill for a family of four ranged from $512-$986 depending on how “liberal” you are with your purchases. For simplicity’s sake we’ll take the mid-point of this range ($750) as a monthly food bill.

    This brings Joe’s monthly income to $1,688.

    Now, Joe needs light, energy, heat, and air conditioning to run his home. According to the Energy Information Administration, the average US household used about 920 kilowatt-hours per month in 2008. At a national average price of 11 cents per kilowatt-hour this comes to a monthly electrical bill of $101.20.

    Joe’s now down to $1,587.

    Now Joe needs to drive to work to make a living. Similarly, he needs to be able to drive to the grocery store, doctor, etc. According to AAA, the average cost per mile of driving a minivan (Joe’s a family man) in 2008 was 57 cents per mile. This cost is based on average fuel consumption, tires, maintenance, insurance, license and registration, and average loan finance charges.

    Multiply this cost by 15,000 miles per year and you’ve got an annual driving bill of $8,550. Divide this into months (by 12) and you’ve got a monthly driving bill of $712.

    Joe’s now down to $877 (I’m also assuming Joe’s family only has ONE car). Indeed, if Joe’s family has two cars (one minivan and one sedan) he’s already run out of money for the month.

    Now, assuming Joe’s family is one of the lucky ones (depending on your perspective) they’ve got medical insurance. Trying to find an average monthly medical insurance premium for a family in the US is extremely difficult because insurance plans have a wide range in deductibles, premiums, and co-pays. But according to eHealth Insurance, the average monthly premium for family policies in February 2008 was $369.

    So if Joe has medical insurance on his family, he’s now down to $508. Throw in cell phone bills, cable TV and Internet bills, and the like, and he’s maybe got $100-200 discretionary income left at the end of the month.

    This analysis covers all of the basic necessities of the average American household: mortgage payments, food, energy, gas, driving expenses, and medical insurance. It also assumes that Joe:

    1) Didn’t overpay for his house
    2) Made a 20% down-payment of $45K on his home purchase
    3) Has no debt aside from his mortgage (so no credit card debt, student loans, etc)
    4) Only has one car in the family and drives 15,000 miles per year
    5) Keeps his energy bill reasonable
    6) Does not eat out at restaurants ever/ keeps food expenses moderate
    7) Has no pets
    8 ) Pays for health insurance but has no monthly medical expenses (unlikely with two kids)
    9 ) Keeps his personal budget under control regarding cable TV, Internet, and the like
    10) Doesn’t spoil his kids with toys, gadgets, trips to the movies, etc.
    11) Doesn’t take vacations.

    Suffice to say, I am assuming Joe maintains EXTREMELY conservative spending habits. Personally, I know NO ONE who meets all of the above criteria. However, even if the above assumptions applied to the average American, you’re still only looking at $100-200 in “wiggle” room for spending per month!

    If Joe:

    1) Overpaid on his house
    2) Didn’t have a full 20% down payment
    3) Owns two cars
    4) Eats at restaurants
    5) Splurges on heating & A/C bills
    6) Has any medical expenses aside from monthly premiums…

    … he is running into the red EVERY month.

    I also wish to note that my analysis didn’t include real estate taxes [ or state income taxes or state/local sales taxes - sic ] and numerous other expenses that most folks have to pay. So even if you are extremely frugal and careful with your money, it is impossible to “get by” in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes.

    This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes)."(snip)

    from


    The obvious take-away from this 'back of the envelope' calculation is that a significant number of American families have been operating on 'negative' cash flow for years, and have only been able to sustain their lifestyles via increased borrowing ( i.e. rising credit card balances, rising home equity loan debt) to make up for the cash flow shortfall. As increased borrowing has recently become far less possible, as well as far more expensive, a significant number of American families now exist in a financial situation where ... no matter how frugal ... the total dollar amount of their monthly bills exceeds their total income ( especially so if after-tax incomes are declining and prices of 'necessary' items like food and gasoline are rising ).

    Absent some new gov't subsidy program to somehow make up for the monthly cash flow shortfall, these American families are destined for bankruptcy court. Based on March's filings, the probable rate of personal bankruptcies is on a 2 million per year track, or some 2% of total American households. And of course with every future bankruptcy comes future bank losses ( creating pressure for rising interest rates on mortgages / car loans / credit cards to make up for those losses ), future business losses ( creating pressure for rising utility bills, rising retail gasoline / heating oil prices to make up for those losses ) etc.

    ~
    Last edited by Melonie; 04-13-2010 at 03:22 AM.

  2. #2
    Curious Guest JianeJ's Avatar
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    Default Re: personal bankruptcy rate skyrocketing even if still employed

    Bankruptcy have always been that bad situation for anybody, but that doesn't mean one should give up.. This is one of effects of the worldwide financial crisis, and recently I heard that the American Bankruptcy Institute recently introduced numbers demonstrating that 10 percent fewer Americans filed for bankruptcy in Sept than they did last year. However, this is most likely not a symbol of an economic uptick, according to many specialists. According to the analysts, several factors are causing those figures to decline ().

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    Banned Melonie's Avatar
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    Default Re: personal bankruptcy rate skyrocketing even if still employed

    Good 'bump' Jiane. Indeed, as your article points out, 10 million plus Americans are legally prevented from going bankrupt ( again ) due to a previous bankruptcy filing within the ~7 year US statutory limit.

    But there are also other reasons for the (temporary) reduction in bankruptcy filings. One MAJOR one is the 'fallout' from court rulings regarding real estate titles and foreclosures ... which has effectively allowed millions of delinquent American mortgaged homeowners to remain in their homes without the 'necessity' of making additional mortgage payments for literally years in some states. Being able to 'divert' mortgage payment money towards paying on credit cards, utility bills, food and gasoline, etc. has allowed a ( temporary ) postponement of many bankruptcy filings. However, resolution of the legal title / foreclosure issues could quickly change the status quo.

    Another MAJOR reason is policy decisions by banks to ( temporarily ) forego the pursuit of 'deficiency judgements' against defaulted homeowners who have 'walked away' from their mortgages ... and 'stuck' the mortgage holder for losses i.e. the difference in value between the outstanding mortgage balance and the actual selling price at sherriff's auction / short sale. However, the statute of limitations on 'deficiency judgements' also runs for several years, such that these banks or collection agencies may wait for better economic conditions and THEN attempt to collect on 'deficiencies' ... with the risk of pushing defaulted homeowners into bankruptcy at that future point.

    Lastly, there has arguably been a 'rotation' in the types of delinquent debts held by many young Americans due to the fact that gov't backed student loans cannot be disposed of in bankruptcy ... but also because ( so far ) the gov't has been extremely accomodative in regard to 'refinancing' student debt obligations. As a result, many young Americans are directing their paychecks towards credit card payments, utility bills, food and gasoline etc. while 'stiffing' their student loans. This 'rotation' has in fact reached the point where total outstanding US student loan debt now arguably exceeds total outstanding US credit card debt. It remains to be seen if intensified future gov't efforts to collect on delinquent student loans will push additional Americans toward bankruptcy filings ( on other debt ) at some future point.

    Arguably, the above have merely allowed many bankruptcy filings to be postponed by 'kicking the can down the road' through delayed enforcement / delayed collections. You might want to read ... which makes reference to certain investor groups who are 'buying up' delinquent mortgage debt from banks at pennies on the dollar, and who plan on biding their time for a few years while the economy improves only to then emerge from the 'woodwork' to then collect 'deficiency judgements' from deadbeat homeowners who will ( hopefully, from the investors' viewpoint ) have rebuilt their assets to the point where the deficiency can actually be collected.

    ~
    Last edited by Melonie; 10-11-2011 at 12:53 AM.

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