Current Industry Research
Consumer credit markets are under severe stress with no clear signal that the bottom has been reached. Delinquencies continue to rise and many analysts predict that consumer credit will replicate the mortgage market meltdown. Credit issuers are working quickly to limit losses by slashing credit limits and raising interest rates – even on accounts in good standing and to consumers with high credit scores.
From the Federal Reserve Statistical Release of Jan 2009
The total US consumer credit card and non-credit card debt, excluding mortgage debt, rose to $2.564 trillion as of January 2009. Of that total, debt in revolving interest accounts represents $961.3 billion and non-revolving debt accounts for $1.603 Trillion.
Industry Update for Consumer Credit Issuers
After many years of rising profits, credit card companies are experiencing record losses in 2009. As reported by Innovest Strategic Value Advisors, the industry absorbed a $41 billion dollar charge off in 2008, and this year the loss is expected to reach $96 billion.
As recently as 2006, the industry earned record profits. That year credit card issuers earned $91 billion from interest revenue charged to card holders and another additional $55.2 billion was made from annual fees, cash advances fee, and penalties. It is estimated that the net pretax profits for the total year was $36.8 billion. This, according to the US Census Bureau, came from 173 million individual credit card holders, or an average of $845 per cardholder. They estimate the number of credit card holders will reach 181 million by 2010, and that there are more than 1.5 billion credit cards in use in the US today.
Consumer Bankruptcy Filings
Bankruptcy filings are climbing towards records set in 2005, when consumers rushed to take advantage of more lenient laws prior to passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which took effect in October 2005. The new regulations made it more difficult for consumers to discharge debts under a Chapter 7 bankruptcy liquidation, and instead, forced more people into the Chapter 13 qualifications that required debts to be repaid through a mandatory payment schedule.
Here are the numbers from the past five years:
| Year | 1st Quater | 2nd Quater | 3rd Quarter | 4th Quater | Total |
|---|---|---|---|---|---|
| 2005 | 393,086 | 458,597 | 532,526 | 654,633 | 2,039,214 |
| 2006 | 112,685 | 150,975 | 165,862 | 177,599 | 617,660 |
| 2007 | 187,361 | 203,744 | 211,742 | 218,428 | 822,590 |
| 2008 | 236,982 | 266,767 | 280,787 | 288,436 | 1,074,225 |
| 2009 | 330,477 | 381,073 | 388,485 | 312,803 | 1,412,838 |
Source: American Bankruptcy Institute
Note the sharp drop from 2005’s record highs to the low totals for the first quarter of 2006, when only 112,685 bankruptcy petitions were filed. However, the totals have risen steadily since then, and at the end of 2008, the number of filings is again exceeded one million for the year.
Update: In 2009, the total filings surpassed 1.4 million, soaring 32% from the previous year – making it the highest since the passing of the BAPCPA. The most recent data available (November 2009) show that Chapter 7 filings were up 42% compared with the same period a year earlier. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November. There has also been an increase in bankruptcy filings among borrowers with above average incomes.
The surge can be attributed to foreclosure and unemployment. For those reasons, most borrowers now qualified for Chapter 7 bankruptcy and could walk away from their debts without entering into a repayment program under Chapter 13. The new bankruptcy legislation was intended to prevent consumers from discharging debts in such ways; however, due to the current economic conditions, they have been able to walk without having to pay back nothing.