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EVOLUTION OF DEBT IN CONSUMER BANKRUPTCY CASES OVER THE LAST 20 YEARS

Having practiced bankruptcy law in Augusta for over 20 years, I have had the opportunity to witness firsthand how consumer debt has changed during that time.  While the primary causes that lead to bankruptcy have not changed significantly during that time (unemployment, divorce/separation, health issues and mismanagement), the types of debt involved in the consumer bankruptcy cases has changed considerably.

The amount of multi-purpose credit card debt from the major issuers (Visa, Mastercard, AMEX, Discover) that is owed by consumers has declined during the last 10 years.  However, the proliferation of retail -specific credit cards (Best Buy, Target, Wal-Mart) has filled the void.  So while a typical consumer debtor may owe less credit card debt as percentage of their overall debt, it is not uncommon for them to have more credit card accounts.

Title pawn loans were virtually nonexistent in the State of Georgia in the mid-1990’s, but they make up a significant portion of the secured debt in lower income consumer cases.  Advertised as loans to address temporary “emergencies”, they usually put a consumer on a long-term path to bankruptcy or repossession.  Because these are “pawns” and not standard financing, the usury laws of Georgia do not apply, and the standard annual interest rate is between 132%-158%.  Unless the debt is paid off in a lump-sum, it will cost the consumer much more than the vehicle is worth to pay off the loan over time.

“Internet loans” are a recent phenomenon, but are quickly growing as a portion of the typical consumer debt portfolio.   The loans typically originate from states with creditor-friendly usury laws, or may even be funded by lenders outside of the United States.  These lenders will insist on payment via bank account debit, in order to secure timely payment.  However, problems can arise when the loans default, as the lenders may debit the entire balance of the loan as soon as funds are available in the account.

Student loan debt has skyrocketed over the last 20 years, and easily one out of every three consumer bankruptcy cases involves some form of student loan debt.  Not only has the amount of student loan debt risen significantly, but a much higher percentage of those with student loan debt have not received a degree, making eventual repayment much more difficult.  Student loan debt is exceptionally difficult to discharge under the present bankruptcy laws.  Another recent change that has made student loans more problematic for struggling consumers is that the federal government has referred collection of many of the defaulted loans to private collection agencies.  While these loans were not aggressively collected in the past, the collection agencies have changed the dynamic, and made these loans impossible to ignore.

Mortgage debt has decreased, after it peaked about ten years ago.  When I first started practicing, individuals with low credit/no credit that were looking to purchase a home usually opted for a mobile home, as they could not qualify to traditional mortgage financing.  As the banks began to loosen their lending restrictions in the early to mid-2000’s, consumers who would have normally been routed towards a mobile home purchase were now eligible to finance a regular home.  No document (“no-doc) and/or low document (“low-doc”) mortgages became more popular, generating more risk for the lenders.  In addition, many lenders placed un-savvy or unsophisticated borrowers in adjustable-rate mortgages (“ARM’s”) which offered a low and affordable rate for the first 12-24 months, but would rise at the expiration of that period.  Many of these loans went into default as soon as the “ARM” reset to a higher rate, and were foreclosed upon.   Eventually, we experienced the housing collapse.

Now lenders are required to adhere to more rigid underwriting of mortgage loans, and fewer people are eligible to qualify.  Additionally, those individuals who lost a house to foreclosure during the collapse are having much more difficulty re-entering the housing market as a purchaser due to the foreclosure on their credit report, even if their overall credit risk has improved.

Second mortgage debt has also decreased, in part to the tighter lending restrictions, and also due to the reduction in available home equity as prices declined in the wake of the housing collapse.  During the housing boom, we witnessed a lot of “125%” loans, where a lender would finance 100% of the sale price, and then finance an additional loan (at a much higher interest rate) with a second mortgage for 25% of the purchase price.  The lender’s rationale was that the property would continue to increase in value, and they would either be paid off in an eventual resale, or the property value would have climbed to the extent that all of their money would be recovered at foreclosure.  The results for the lenders were catastrophic.  The end result is that lenders are not going to extend a second mortgage for an amount that would exceed the value of the home, and will probably require a significant equity cushion to make sure that they are protected on the second mortgage in the event of default.

Automobile financing represents the same percentage of consumer debt as before, but the financing terms have changed.  When I first started practicing, a 5 year auto loan was the industry standard for a new car purchase.  Loans for pre-owned cars were usually for a shorter duration.  Now, 72 and even 84 month car loans are not uncommon.  In addition, many manufacturers created their own financing arms, so that they would earn the money off the loan interest rather than a third party lender.  Other than credit unions, third-party car loans by banks have become very rare.  Instead, dealerships finance the purchase of their cars through their own related companies (Ford Motor Credit, Nissan Motor Acceptance, Chrysler Financial, Ally/GMAC, Southeastern Toyota Finance, etc.).  Unfortunately, borrowers on these long-term loans will encounter difficulty in trading the vehicle in, as the depreciation will outstrip the principal reduction during the first years of the loan.

Medical debt has risen slightly as part of the traditional debtor debt load, in part due to higher cost of care, and also due to the reduction in those who have health insurance.  This has created a market for collection agencies that specialize in medical collections.   While it may not be worthwhile to sue a debtor over one medical bill, a collection agency may purchase the rights to collect on multiple bills, making it more worthwhile to pursue recovery thought the courts.

No matter what precautions are taken, there is always the possibility that an unforeseen event may compromise your ability to pay your debts in a timely manner.  If you are facing some of the risks described in this article – a lawsuit, foreclosure or repossession – contact a bankruptcy attorney before it is too late so that you can learn your legal rights.