The number of people finding bankruptcy in the United States will likely be the second-highest total ever. With stagnant wages and increasing levels of unemployment, nearly 130,000 families filed for bankruptcy last month alone.
The obvious reason for the dramatically increased bankruptcy rates is that it’s a side-effect of the recession and overall unemployment rates. This recession is particularly troubling on bankruptcy rates because many people are carrying very large amounts of debt relative to their income and are unable to service that debt when they lose their jobs or have their hours cut back.
According to Barron’s Magazine, the average household debt level in America stayed at 60% of their personal income for several decades, all the way through 1985. Today, the debt to income ratio that Americans have has reached over 130%. Previously, Americans carried a total debt of 20% of the country’s output of goods and services (the GDP), but today that figure is up to 100%. Americans cary five times the level of debt relative to the economy that they used to.
Consumer debt levels have dropped a bit since the beginning of the recession as consumers go through the process of deleveraging, but it’s hard to decrease one’s personal debt level during a job loss or reduction in hours, magnifying the problem of high-levels of personal debt for the unemployed and underemployed.
Having large amounts of medical debt is another major reason that people have filed bankruptcy in the last several years. Consumers face major medical problems and find that they don’t have coverage or enough coverage for the treatment they need and end up filing bankruptcy because of the massive levels of debt that they’ve taken on. Some statistics indicate that between one-third and one-half of bankruptcies involve large amounts of medical debt.