Consumer Bankruptcy and Household Debt

Mark Jickling
Specialist in Financial Economics

Jennifer Teefy
Information Research Specialist

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA, P.L. 109-8) included the most significant amendments to consumer bankruptcy procedures since the 1970s. Bankruptcy reform was enacted in response to the high number of consumer bankruptcy filings, which in 2004 and 2005 reached five times the level of the early 1980s. Why did filings increase so dramatically during a period that included two of the longest economic expansions in U.S. history? Since bankruptcy is by definition a condition of excessive debt, many would expect to see a corresponding increase in the debt burden of U.S. households over the same period. However, while household debt has indeed grown, debt costs as a percentage of income have risen only moderately. What aggregate statistics do not show is that the debt burden does not fall evenly on all families. Financial distress is common among lower-income households: in 2007, 27% of families in the bottom fifth of the income distribution spent more than 40% of their income to repay debt. 

Following the effective date of BAPCPA, in October 2005, there was a sharp reduction in the number of bankruptcy filings, in part because there was a "rush to the courthouse" to file before the new law took effect. Since the 2006 lows, the number of filings has risen steadily. In 2009, personal bankruptcy filings reached 1.4 million, close to pre-BAPCPA levels. Unless there is a sharp post-recession reduction (which has not been the historical pattern), it appears that BAPCPA will not produce the effect its supporters hoped for—a permanent reduction in the rate of consumer bankruptcy. 

With the recession and financial crisis that began in 2007, the long-term upward trend in consumer indebtedness was interrupted. Amounts owed in all major categories of household debt fell, most significantly in credit card debt outstanding (down by 11.4% between December 2008 and January 2010) and home equity loans (down 8.6% during 2008 and 2009).


Date of Report: April 1, 2010
Number of Pages: 8
Order Number: RS20777
Price: $29.95

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