Credit Card Debt Key Factor in Record Number of Consumer Bankruptcies Filed in 2005

By Lydia Verret, CardRatings.com Reporter

2005 consumer bankruptcy filings were the highest on record according to Lundquist Consulting, Inc., experts in bankruptcy statistics and analytics. There were 2,043,535 consumer bankruptcies filed in 2005 as opposed to 1,552,967 filed in 2004.

Much of the 31.6 percent rise over 2004 bankruptcy filings can be attributed to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was enacted on October 17, 2005. Many consumers filed earlier in the year to take advantage of the old bankruptcy laws.

Since the enactment of the new law in October, almost 60% of bankruptcies have been filed as Chapter 13 instead of Chapter 7. Only 30% of bankruptcies were filed as Chapter 13 in previous years (under the old law). Overall, Chapter 7 consumer filings increased 47.2 % in 2005, while Chapter 13 filings, which require a percentage of debts to be paid, declined 7.9%. The new law requires consumers to file under Chapter 13 unless they meet the requirements of a “means test” that determines the consumer’s debt and income requirements.

Consumer credit card debt greatly contributes to the amount of bankruptcies filed each year. According to consumer advocate Gerri Detweiler, author or The Ultimate Credit Handbook and host of EverydayWealth Radio,

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“Regardless of how much consumers owe, it is often credit card debt and/or medical bills that push them over the edge. One of the biggest problems we’ve seen over the past couple of years has been issuers raising interest rates to 20 - 30% or more. That can cause a lot of people to throw up their hands and say, ‘Why even try?’”

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Detweiler went on to say,

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“There has been a decline in recent bankruptcies which is probably due to several things: the fact that so many consumers filed before the new law took place, a misconception among consumers that bankruptcy isn’t an option, and concerns about how the new law will apply in actual cases. I imagine some of that will be ironed out. What I don’t imagine is that the new law will put a lot more money in creditors’ pockets right away. Instead consumers will just look for other ways to deal with their debts. If they can’t pay, they can’t pay.”

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Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect in October, fewer consumers have filed for bankruptcy. Regardless of the number of bankruptcy filings in 2006, one thing that is for sure is that consumer credit card debt will likely continue to be a significant factor in new filings.

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