Personal bankruptcy rate slows while consumer credit rises

While the economy remains stubbornly stagnant, with many New Yorkers still unemployed, some positive signs have emerged. For example, Fitch Ratings recently offered welcome news to New Yorkers: the personal bankruptcy rate dropped by 14 percent last year, which exceeded an earlier prediction of 11 percent.

The dip marks the second time personal bankruptcy rates dropped since 2005, the year the Bankruptcy Abuse Prevention and Consumer Protection Act became law. Fitch predicts 2013 will mark the third year bankruptcies rates trend lower.

After that, however, experts suggest repayment indicators such as credit card delinquencies and charges will begin to return to historical norms.

Despite the drop, consumer credit continues to rise. In fact, total consumer credit topped three trillion dollars last November, a six percent rise from the year prior. Of that total, most involved non-revolving credit such as auto loans and student loans.

As the overall consumer credit rate suggests, many New Yorkers have borrowed significant sums. When these New Yorkers find themselves on the wrong end of events such as a serious disease, unemployment and other unlucky occurrences, filing for bankruptcy may be the right choice.

Filing for bankruptcy puts an immediate halt to creditor harassment. One need not pay off all one's bills to get freedom from abusive debt collectors. That is because the bankruptcy court will file an automatic stay as soon as the filing takes place that makes it illegal for creditors to contact the filer. If they do attempt to do so anyway, a filer may have legal recourse.

Consumer bankruptcy comes in two main forms: Chapter 7 bankruptcy, known as debt liquidation, and Chapter 13 bankruptcy, called debt reorganization. Either form offers a respite from creditors and a chance at a fresh start.

Source: Reuters, "TEXT-Fitch: Belt-tightening continues for U.S. consumer; bankruptcies to drop again," Jan. 23, 2013