The New York Times Dealbook blog reported that household debt has reached what appears to be an ominous milestone: As of the first quarter of 2017, American households now owe about $12.7 trillion, equal to what they owed in the third quarter of 2008—the previous peak before panic gripped the financial sector. So should New York bankruptcy lawyers prepare for a wave of bankruptcy cases? The answer is no for many reasons.
One, as the article points out the composition of household debt is quite different from late 2008. Back then, mortgage debt accounted for 73 percent of total household debt, whereas it’s only 68 percent now. By contrast, student debt and auto debt now take up larger proportions of household debt. Student loans were 5 percent of household debts in 2008; now they’re 11 percent. Auto loans have grown from 6 percent to 9 percent as well.
Auto loans have expanded mainly because auto finance companies are issuing loans to subprime borrowers that they weren’t before. Unsurprisingly, subprime auto loan delinquencies are rising. Bankruptcy offers auto-loan debtors a few more options than it does for homeowners, including the possibility of cramming down an auto loan to the car’s market value. I’ve written generally about how to keep a car in New York bankruptcy.
As for student loans, the problems are more complex than for other kinds of unsecured debts. Although they are usually not dischargeable in bankruptcy, borrowers with federal loans can take advantage of a handful of income-dependent repayment plans that cap monthly payments and forgive the loans entirely after about 20 years. Notably, there are rumors that the new Trump administration’s Education Department might modify these programs, but they give debtors an important alternative to bankruptcy. Although it does not look like many of these loans will be repaid, the government’s debt problems aren’t yours.
Two, although debt is up, so are jobs and income. One drawback to looking at only consumers’ debts is that it ignores their jobs, incomes, and wealth. All of these measures have improved since 2008, so looking at debts as though they are becoming a problem again misses the whole picture.
Three, interest rates are still low. Much of debt payments are interest charges, especially early in the repayment cycle. As a result, with variable-rate loans, the interest charges are low, and with recently issued fixed-rate loans, the charges will stay low even if interest rates rise generally.
To be clear, the Dealbook post, which is here, largely raises these points, but it’s important to emphasize that today’s $12.7 in household debt isn’t as dangerous as it was in 2008. It’s a reason to avoid needlessly focusing on these kinds of milestones.
For New Yorkers, however, household debt isn’t on as sound footing as for the rest of the country. There’s evidence that New York City homeowners are struggling more than the national average. If you are experiencing problems paying your debts, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
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.
