BANKRUPTCY AND CREDIT CARD DEBT (CRS Report for Congress)
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| Release Date |
March 19, 1998 |
| Report Number |
98-277 |
| Report Type |
Report |
| Authors |
Mark Jickling, Economics Division |
| Source Agency |
Congressional Research Service |
Summary:
Personal bankruptcy filings now exceed one million per year. Why should bankruptcies have
risen
to record levels during a period when the economy has enjoyed two of the longest peacetime
expansions in history, with unemployment, inflation, and interest rates all falling? Something must
have changed in household finance; credit cards are among the "usual suspects."
Credit cards figure prominently in the debate over bankruptcy reform. Credit card lenders argue
that bankruptcy makes it is too easy for debtors to avoid paying their debts, creating an incentive for
reckless or fraudulent borrowing and exacerbating recent losses to credit card loan portfolios. They
support legislation ( H.R. 2500 and S. 1301 ) that would require some
debtors to repay a portion of what they owe. Opponents of such proposals, including some consumer
groups, argue that the high-power marketing campaigns of credit card issuers amount to an
irresponsible extension of credit to households with low incomes and little financial sophistication,
many of whom are then thrust into bankruptcy by any unforseen economic trouble.
Does bankruptcy cause excessive losses to lenders, or do lending practices cause bankruptcies?
Credit card debt has grown rapidly since the early 1980s, but it is still a small share (less than 11%)
of all household debt, which is dominated by mortgage and home equity debt. However, the interest
charged on credit cards is high, and, moreover, it is "sticky," that is, credit card lenders have not cut
their rates when the general level of interest rates falls. Reasons for this stickiness may lie in
structural and permanent features of the market, or in unique historical circumstances in the credit
card industry's development; in any case, a dollar of credit card debt is more expensive than a dollar
of other debt.
Since 1989, the aggregate debt burden (debt payments as a percentage of income) of American
families has been flat. However, the debt burden has fallen for upper income families and risen for
low-income families. Financial distress (when more than 40% of income goes to debt service) has
also increased among lower-income families. Have credit cards played a role in these trends? The
debt burden arising specifically from credit cards appears to be minor: 0.5% of income in 1995, but
somewhat higher and rising for low-income households. Could credit card borrowing by low-income
families, though small in the aggregate, be a straw that broke the camel's back and a source of
increased bankruptcy filings?
The percentage of families using credit cards to borrow has increased since 1983, with lower-
income families leading the rise. However, the median amount borrowed by low-income families
has
not risen significantly: the expansion of credit card loan volume is primarily attributable to upper-
income borrowers increasing their balances. And for these borrowers, the overall debt burden has
been falling.
The available aggregate data do not show that credit card debt has caused a major shift in U.S.
household financial conditions. Many bankruptcy filers no doubt have unusually high amounts of
credit card debt, but statistical information about their overall financial circumstances does not exist.
