Order Code RS20777
Updated March 21, 2005
CRS Report for Congress
Received through the CRS Web
Consumer Bankruptcy and Household Debt
Mark Jickling
Specialist in Public Finance
Government and Finance Division
Summary
On March 10, 2005, the Senate passed bankruptcy reform legislation (S. 256) that
would require some consumer bankruptcy petitioners to repay certain debts rather than
have them discharged, or erased, by the bankruptcy court. The principal impetus behind
bankruptcy reform is the high number of consumer bankruptcy filings, which in recent
years has been running at five times the level of the early 1980s. It is not clear why
bankruptcy filings have increased so dramatically during a period that has included two
of the longest economic expansions in U.S. history. Since bankruptcy is almost by
definition a condition of excessive debt, many would expect to observe a corresponding
increase in the debt burden of U.S. households over the same period. However, while
household debt has indeed grown, debt costs as a percentage of income have been fairly
constant over the past two decades. What these aggregate statistics do not show is that
the debt burden does not fall equally on all families. Financial distress is most common
among lower-income households: in 2001, 27% of families in the bottom fifth of the
income distribution had debt service obligations that exceeded 40% of their incomes.
This suggests that explanations for the rise in consumer bankruptcy filings are more
likely to be found in micro-analysis of individuals and groups of debtors than in
macroeconomic indicators. This report presents statistics on bankruptcy filings,
household debt, and families in financial distress, and will be updated as new statistics
become available. For discussion of bankruptcy reform proposals, see CRS Report
RL31706, Bankruptcy Reform: A Recap.
The tables below present data on bankruptcy filings, household debt, and families
in financial distress. Table 1 shows bankruptcy filings since 1980. Both business and
non-business bankruptcies showed increases in the early 1980s, but business filings
peaked in 1987 and have since declined, while the number of consumer filings has
continued to grow. Consumer bankruptcies exhibit a pattern of rapid annual growth for
several years, a two- or three-year pause, and a resumption of growth. In each calendar
year from 2001 through 2003, number of consumer bankruptcy filings set a new record.
In 2004, however, the number of filings declined by 3.8% from the previous year.
Congressional Research Service ˜ The Library of Congress

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CRS-2
Table 1. Bankruptcy Filings in the United States, 1980-2004
Nonbusiness or Consumer Filings
Total
Business
Year
% Change
Filings per
Number
Number
Number
from Previous
1,000
Year
Population
1980
331,264
43,694
287,570
46.0
1.26
1981
363,943
48,125
315,818
9.8
1.37
1982
380,251
69,300
310,951
-1.5
1.34
1983
348,880
62,436
286,444
-7.9
1.22
1984
348,521
64,004
284,517
-0.7
1.20
1985
412,510
71,277
341,233
19.9
1.43
1986
530,438
81,235
449,203
31.6
1.87
1987
577,999
82,446
495,553
10.3
2.04
1988
613,465
63,853
549,612
10.9
2.24
1989
679,461
63,235
616,226
12.1
2.49
1990
782,960
64,853
718,107
16.5
2.87
1991
943,987
71,549
872,438
21.5
3.45
1992
971,517
70,643
900,874
3.3
3.53
1993
875,202
62,304
812,898
-9.8
3.15
1994
832,829
52,374
780,455
-4.0
2.99
1995
926,601
51,959
874,642
12.1
3.33
1996
1,178,555
53,549
1,125,006
28.6
4.24
1997
1,404,145
54,027
1,350,118
20.0
5.02
1998
1,442,549
44,367
1,398,182
3.6
5.17
1999
1,319,465
37,844
1,281,581
-8.3
4.68
2000
1,253,444
35,472
1,217,972
-5.0
4.54
2001
1,492,129
40,099
1,452,030
19.2
5.10
2002
1,577,651
38,540
1,539,111
6.0
5.33
2003
1,660,245
35,037
1,625,208
5.6
5.59
2004
1,597,462
34,317
1,563,145
-3.8
5.32
Source: Administrative Office of the U.S. Courts.

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CRS-3
Table 2. Household Debt Levels and Debt Burden, 1990 — 2004
(At end of year, except as noted for 2004)
Consumer Credit
Home Mortgage Debt
Debt Burden
Debt as % of
($ billions)
($ billions)
(% of Income
Disposable
Year
Used for Debt
Personal
Non-
Home Equity
Revolving
Total
Total
Payments)
Income
revolving
Loans
1990
250.9
554.2
805.1
233.9
2,504.1
11.99
86.2
1991
277.1
517.4
794.5
240.7
2,683.5
11.53
87.3
1992
292.2
508.3
800.6
236.7
2,857.5
10.80
86.4
1993
325.0
534.0
859.0
229.1
3,017.3
10.79
86.6
1994
383.2
600.7
983.9
241.9
3,186.6
11.17
87.9
1995
464.1
658.7
1,122.8
259.4
3,344.3
11.87
89.8
1996
494.4
683.1
1,182.6
290.8
3,555.4
12.10
90.1
1997
531.0
712.0
1,243.0
331.9
3,779.3
12.10
90.5
1998
562.5
755.0
1,317.5
361.2
4,090.8
12.10
92.0
1999
597.7
818.6
1,416.3
401.5
4,459.5
12.42
93.6
2000
666.5
894.0
1,560.6
492.0
4,821.2
12.84
94.9
2001
699.4
968.0
1,667.5
518.0
5,285.8
13.30
99.1
2002
711.2
1,011.1
1,722.3
583.3
5,909.5
13.36
103.9
2003
744.6
1,257.2
2,001.8
684.9
6,643.1
13.15
104.1
2004
748.3
1,305.0
2,053.3
881.3
7,542.8
13.26
105.1
Source: Federal Reserve. Release G. 19 (consumer credit) and Flow of Funds Accounts, Table L. 218 (household mortgage debt).
Note: 2004 figures represent end of 3rd quarter, except for debt burden, which is end of first half.

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CRS-4
Table 2 shows figures on household debt. The major categories of household debt
are mortgage debt and consumer credit, which together comprise about 97% of all
household indebtedness. Consumer credit consists of revolving credit, or credit card debt,
and non-revolving debt, which is dominated by auto loans (though it also includes loans
for boats, mobile homes, vacations, and so on). Mortgage debt is borrowing secured by
real estate. A rapidly growing category within mortgage debt, home equity lending, is
broken out in the table because it may substitute for consumer credit in many cases.
Table 2 also includes Federal Reserve estimates of the burden of debt service, that
is, the percentage of household disposable income that goes to repay loans. The debt
burden figures in Table 2 fluctuate within a fairly narrow range: from 10.80% to 13.36%.
(During the 1980s, the range was similar: from 10.6% to12.5%.) Although the burden of
debt has risen since 1990, the rise has not been so dramatic as to account for the fivefold
increase in personal bankruptcy filings over the past two decades.
It should be kept in mind that interest rates — particularly mortgage rates —
declined in recent years to the lowest levels since the 1950s, and they remain low despite
the Federal Reserve’s actions to raise rates since mid-2004. Therefore, the relative
stability of the debt burden in the face of falling interest rates implies that the ratio of debt
outstanding to income has been rising. This ratio — the sum of consumer and mortgage
debt shown in the table expressed as a percentage of disposable personal income — is
shown in the right hand column of Table 2. The increases in this figure, particularly in
the last few years, suggest that further increases in bankruptcy filings (and perhaps
problems for lenders) may lie ahead if interest rates rise significantly, although the
prevalence of fixed-rate mortgages would mitigate this effect. For the present, however,
falling rates have permitted households to take on more debt without a corresponding
increase in the debt burden.
The aggregate household debt numbers mask important differences among families:
some have done very well in the long booms of the 1980s and 1990s, while others have
taken on debt that they have difficulty repaying. Table 3 below, based on the Federal
Reserve’s Survey of Consumer Finances, shows the percentage of families at various
income levels who devote more than 40% of their incomes to debt service, for selected
years from 1992 through 2001.

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CRS-5
Table 3. Percentage of Families in Financial Distress
by Income Level, 1992-2001
Percentile of Income
1992
1995
1998
2001
Distribution
All Families
10.8
10.6
12.8
11.0
Below 20
26.4
26.2
28.2
27.0
20 — 39.9
15.1
16.0
17.2
16.0
40 — 59.9
10.1
8.1
15.3
11.7
60 — 79.9
7.6
7.1
8.6
5.6
80 — 89.9
2.9
4.6
3.4
3.5
90 — 100
2.5
2.0
2.6
2.0
Source: Federal Reserve. Survey of Consumer Finances. In: Federal Reserve Bulletin, January 2003.
Note: “Financial distress” means that debt service payments consume over 40% of the family’s income.
Two noteworthy facts emerge from the data in Table 3. First is the high rate of
distress among lower-income families, who are the most likely to file for bankruptcy.1
Second, like the debt burden figures shown in Table 2 above, there is no sharply rising
trend that would explain the dramatic increase in personal bankruptcy filings. Between
1998 and 2001, the incidence of financial distress fell, even for those in the bottom income
quintile. As a result of the 1998-2001 decline, for which falling interest rates may be
primarily responsible, the percentage of all families in distress in 2001 is little changed
from the 1992 figure. Consumer bankruptcies in 2001, on the other hand, were up 61%
over 1992 levels.
The question remains why so many families at or below the national median income
take on high levels of debt and end up in bankruptcy court. Some explanations focus on
particularly vulnerable populations: the sick and uninsured (or underinsured), the divorced,
or residents of states without mandatory uninsured motorist coverage. Supporters of
bankruptcy reform maintain that the current bankruptcy code is too debtor-friendly and
creates an incentive to borrow beyond the ability to repay, or in some cases without the
intention of repaying. Opponents of reform claim that financial distress is often a by-
product of the high-pressure marketing campaigns of credit card issuers and other
consumer lenders. Lack of a consensus explanation for the rise in consumer bankruptcy
filings ensures that reform efforts will be controversial.
1 Several studies in the mid-to-late 1990s reported that the median income of bankruptcy
petitioners was about $22,000. See U.S. Government Accountability Office, Personal
Bankruptcy: Analysis of Four Studies on Chapter 7 Debtors’ Ability to Pay, GAO/GGD-99-103,
June 1999, p. 23.

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