In over our heads—debt burdens, bankruptcies on the rise

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for September 4, 2002.

In over our heads-debt burdens, bankruptcies on the rise
For the typical American household, rising debt, not a rising stock market, is the big story of the 1990s. By 2001, total household debt exceeded total household disposable income by an all-time high of nearly 10%. Much of the run-up in debt occurred over the economic boom, as the ratio of debt to personal disposable income rose from 87.7% in 1992 up to 109.0% in 2001. The ratio of debt to personal income began to increase after World War II and remained at about 70% from the mid-1960s to the mid-1980s. After 1984, Americans increased their borrowing, primarily by taking on more mortgage debt.

Households in the middle of the wealth distribution saw the largest share of this run-up in debt. While low nominal interest rates have made it easier for households to carry the greatly expanded debt, many households appear to be straining. The most recent government data show that 14% of middle-income households have debt-service obligations that exceed 40% of their income; 9% have at least one bill that is more than 60 days past due. For many, the debt run-up begins from the day they exit college, as student-loan debt loads have risen substantially over the 1990s.

Taking on debt isn't inherently bad and can even be a good thing, if it allows families to make investments, such as in education or to own a home. However, higher debt burdens put workers in a precarious situation. For example, if interest rates rise, the cost of variable-rate debt (such as consumer credit) may increase beyond affordability. Job loss could also upset this fragile balance, as a family living from paycheck to paycheck may be unable to keep up with mortgage payments or other financial responsibilities. We are seeing evidence that, as the recession unfolds, current debt is more than many families can handle. Personal bankruptcy rates reached all time highs by 2001 and hit a new record in the second quarter of 2002 when 390,991 new non-business bankruptcies were declared.

This week's Snapshot by EPI economist Heather Boushey.

Check out the archive for past Economic Snapshots.