Debt Growth and Bankruptcy

Extraordinarily low unemployment and strong growth in personal incomes have both helped to lift financially troubled consumers away from bankruptcy.   However, consumers have helped themselves by scaling back their use of non-mortgage debt.   Credit card issuers have noticed higher payment rates and slower growth in outstandings over the past two years.   Data provided by Trans Union and derived from their  TrenData database confirms that consumers reduced their holding of revolving debt through all of 1998 and much of 1999, even as mortgage debt continued to grow.   This recent moderation in the growth of consumer debt is probably contributing to the decline in personal bankruptcies that has characterized 1999.

As reported in the December, 1999 issue of Monthly Statements, Trans Union’s monthly newsletter on consumer borrowing and payment behavior, debt per borrower grew steadily during 1998 and 1999 but its major components, consumer and mortgage debt, grew at widely divergent rates.   Mortgage debt per borrower grew by 7.3% during the 12 months ending in the third quarter of 1999.  In contrast, consumer debt (credit cards, auto loans and other closed-end installment loans) per borrower actually fell on a year-over-year basis through most of 1998 and the first half of 1999.   Figure xx reveals that the most dramatic drop was in revolving credit per borrower.   More precisely, as of third quarter, 1999, revolving debt per borrower had fallen compared to the previous year for 6 consecutive quarters.   It is true that much of this decline may have been due to the wave of mortgage refinancings that occurred while interest rates were low during 1998.   Consumers transferred billions of dollars of credit card balances to their mortgage and home equity lines.   Even so, the rate at which balances were rolled off exceeded the speed with which consumers chose to rebuild them by taking on new revolving debt.