In part two of our series on why there are rising numbers of middle-class Americans filing for bankruptcy, we discussed the impact of job losses and rising unemployment. In the final part of this series we will discuss how our unsustainable personal debt level has conspired to push middle-class Americans into bankruptcy.
Part III - High Debt Levels Push Middle-Class Into Bankruptcy
During the boom years, the economy became fat off of the willingness many middle-class Americans to live off debt. Want a car? Use debt. Want a bigger house? More debt. You need furniture? No problem, just charge it to your credit card. The average American was drowning in debt at the height of the financial boom; but most didn't worry because they were confident that their jobs were only going to get better, salaries higher and their homes would always appreciate. Some people were so confident that things could only get better that they used their homes as an ATM, taking out home equity loans for home improvements, to buy vehicles or even luxuries. And that behavior was not checked by mortgage lenders or the community in general.
Spend, Spend, Spend was the motto and those who didn't agree might have even faced ostracism. In the mean time, legislators were busy attempting to make it difficult to file bankruptcy by passing 2005 bankruptcy reforms under the guise of preventing fraud and mortgage lenders were busy selling toxic loans to those many naïve or uninformed homeowners. The combination of credit card debt, toxic mortgage debt, inflated home prices and low savings created a powder keg that exploded when the recession hit in 2007. Many middle-class Americans found themselves job loss and unable to pay off their massive debt loads. Even with unemployment insurance and a little savings, debt levels were too high for any of that to make a difference.
For middle-class Americans who were not unemployed, resetting ARM's became the culprit that sent them over the edge to bankruptcy. Confident that their home values would increase and that they could simply refinance or sell, American homeowners with ARMs found that they were stuck with mortgage payments that had tripled and no way to get out due to the credit crunch. Bankruptcy filings soared. Bankruptcy, especially for homeowners facing foreclosure, became the only practical remedy for middle-class Americans who saw their lifestyles eviscerated.