Personal Bankruptcies Hit Record 1 Million

A record 1 million U.S. consumers filed for personal bankruptcy in the last 12 months, the American Bankruptcy Institute said.

“Today’s bankruptcy boom is the natural result of three years of sustained consumer spending increases that far outpaced income growth,” said Sam Gerdano, the institute’s executive director.

At the same time, bankruptcy has become more socially acceptable.

For the 12 months ended June 30, bankruptcy filings exceeded 1.04 million, a 23.3% increase from the same period two years earlier. Personal bankruptcy, which accounted for 95% of filings, jumped 25.4% to 989,172.

Americans borrowed $1.14 trillion during the 12 months.

For the second consecutive quarter, bankruptcy filings increased in all 50 states.

The surge in bankruptcies prompted the federal court system to create positions for 11 new bankruptcy judges.

The Alexandria, Va.-based American Bankruptcy Institute provides research and education on bankruptcy issues.

Most bankruptcy candidates are getting into financial trouble by borrowing against their credit card limits, an easy-to-get unsecured loan, analysts said.

Many aren’t even waiting until their accounts become overdue, preferring to pass that stage and proceed directly to Bankruptcy Court.

“Among the people who filed for bankruptcy in the last quarter, half were current in their accounts,” said Dorothy Horvath, president of Robert Morris Associates, a trade association of credit risk managers. Horvath is also chief credit officer at National City Corp.

Traditionally, Horvath said, people would fall behind on their loans and work with their lender to pay off the debt through alternative financing or payment schedules.

Moody’s Investors Service, which rates bonds backed by credit card loans, said in June that the credit quality of cardholders was the worst since the 1990-91 recession. Bad debts increased to 5.73% of all credit card loans in the 12 months ended in June.

MasterCard International, an international bank association of credit card issuers, has projected that bankruptcy filings will exceed 1.15 million by year’s end, up 24% from 1995.

The trend isn’t going unnoticed.

Just Monday, the Federal Reserve Board said banks are toughening their lending standards, according to their regular bank surveys. Earlier this month, CardTrak, a Frederick, Md.-based company that tracks credit card rates and regulations, said credit card companies have cut back on broad offers of credit cards without much regard to credit burden or risk. Also, higher credit card interest rates are being imposed on higher credit risks by some banks.