Bankruptcy Trends: Are We Biting Off More Than We Can Chew?

Personal Finance

Bankruptcy in the United States and the United Kingdom is on the rise. Unfortunately, this bankruptcy trend is likely to continue through 2012. This and other upsetting trends may change the way you handle your money, and cause you to scratch and scrimp at least for the next couple years.

Numbers Don’t Lie

A recent report from the Department of Trade and Industry (DTI) forecasts that some 28,000 people may be bankrupt by the first quarter of 2010. A large portion of this estimated population may come from some 26,000 Americans, who, as of August 2006, are already insolvent – Americans whose liabilities exceed their assets. The growing amounts of arrears in mortgage and credit card debt is alarming, and so are the increasing demands for debt advice agencies along with bankruptcy. More than 105,000 people phoned the National Debt Line in the first four months of 2006. The number of callers was so overwhelming that the debt line was only able to service a bit more than 30,000 cases.

Spending More and Saving Less

The worsening bankruptcy trend is attributable to a number of factors, one of which is the relaxation of credit card policies. It is easier now more than ever for almost anyone to get a credit card. This availability and accessibility may be giving people a false sense of financial ability, so they tend to spend more than they could actually afford. Some experts are also quick to blame the government, saying that the current reforms in the bankruptcy law – particularly the Enterprise Act of 2002 – have ‘attracted’ people into declaring insolvency. Some economists say that the new laws have made bankruptcy an easy way out. People don’t have to wait three years to exit bankruptcy – these days, it takes only a year.

Where Does the Money Go?

The rising number of bankrupt individuals may also be connected to the prevailing spending habits in the US and the UK. A recent report by the National Statistics says that households spend most on transport and recreation. Households spend the majority of their funds on vehicle payments, entertainment gadgets, and holidays (usually abroad). Could this be part of the reason why household debt has recently reached an all-time high of $1.2 trillion? Insolvent individuals also appear to be spending more. People in the 30 to 49 age bracket spend more than $500 a week, on the average. Interestingly, this is also the age group that often reports insolvency, and eventually bankruptcy.

Future trends

While the rising level of personal debt and bankruptcy is already reaching enormous heights, it could become catastrophic if not controlled. Many economists are optimistic, saying that debt servicing should be manageable for individuals since banks are keeping interest rates low. And for as long as banks do not revert to imposing sky-high interest rates like they did in the past and unemployment continues to go down, the bankruptcy situation may at the same time be controllable.