The Federal Reserve Bank of New York published a fascinating blog post about the 14 percent of U.S. households whose debts exceed their assets. Because a substantial proportion of New York bankruptcy cases involve net debtors, the post illuminates the segment of the country that most likely faces serious financial hardship. One of the chief findings worth discussing up front is that negative wealth affects households very differently.
But first, a brief note on what the New York Fed did. The researchers used data from a survey the Fed introduced in 2013 called the Survey of Consumer Expectations (SCE). The SCE asks 1,300 households how much and what kind of assets and debt they have. Based on the August 2015 version of the study, 15.1 percent of households have $0 or less to their names. As stated above, 14 percent are strictly negative. Other government surveys come up with similar if somewhat higher proportions.
The researchers’ initial findings were largely what one might expect. Net-debtor households tend to be younger than net-creditor households, 43 versus 51, and they earn less than half as much, $39,000 to $86,000. Net debtors are better educated, but they are predominantly renters. They are more likely to be headed by single parents, women, and minorities. Although the SCE depicts many impoverished negative-wealth households, it also captures young, middle-income households that are on the life-cycle path toward positive savings.
The post becomes interesting when the authors divide net debtors into three equal groups by their net worth and compare them to all net-creditor households. Each group of net debtors differs from the others. The first third, down to a net worth of -$12,400 owe a mix of credit-card, auto, and medical debts. The middle third, -$12,500 to -$46,300, owe more mortgage and student debt, but less auto, medical, and credit-card debt. Finally, nearly half of the last third’s debts, -$47,500 to -$520,000, consist of student loans, and most of the rest is mortgage and credit card debt.
As for assets, the composition among the thirds is quite similar. Net debtors’ biggest assets are their cars, but the more debt they have the more housing wealth they have.
Notably, the more households owe, the less it appears bankruptcy can help. Homeowners who are significantly underwater will probably lose their homes and whatever equity they have in them, and student loans are better served with non-bankruptcy options like income-sensitive repayment plans. Meanwhile, the households with less debt have more unsecured credit-card and medical debts. The post’s authors reach similar conclusions, student-loan debt is contributing to wealth inequality, but rising home values will help underwater homeowners.
The NY Fed’s post can be found here.
Many households, even net-creditor households, are struggling with their debts. If that describes you, then you’re not alone, and you should discuss your situation with an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
