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Consumer borrowing and consumer bankruptcy: 2 sides of a coin

Overall levels of consumer debt are unavoidably related to bankruptcy filings.

After all, when consumers take on debt, not all of them are able to pay it back. And some consumers who are in need of debt relief make a strategic choice to file for personal bankruptcy. In other words, consumer debt and consumer bankruptcy are somewhat like two sides of the same coin.

In this post, we will discuss a report showing that consumer debt rose recently by the largest amount since the Great Recession hit in 2007.

The report was issued by the Federal Reserve Bank of New York. The New York Fed found that in the last quarter of 2013, household debt increased by a cumulative total of more than $240 billion. The 2.1 percent increase was the largest since before the recession began in December 2007.

Though the recession officially ended in June of 2009, financial recovery for many people has been slow. Job growth has been sluggish and foreclosures have tended to weigh down the housing market.

The recent Federal Reserve report indicates, however, that the economy has recovered enough to make more Americans feel confident about taking out loans to buy big-ticket items again. This means more:
• Mortgage loans
• Car loans
• Student loans

An economist at the New York Fed noted that consumers have been “deleveraging” for several years in the wake of the recession. The recent trend, however, is for consumers to be taking on more debt again.

Given the large role played by consumers in driving economic growth, this trend bodes well for the overall economy.

To be sure, even loans taken out with confidence can sometimes lead to financial struggles. As we will explore in this blog, that is one reason why the bankruptcy system exists: to provide debt relief and a fresh start in appropriate cases.

Source: Bloomberg, "Household Borrowing Rises Most in Six Years in NY Fed Report," Caroline Salas Gage, Feb. 18, 2014

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