Melanie Fletcher lost her job in 2006, when her position as a program educator for Oregon's Washington County was eliminated. She was able to secure another job within the same office, and though it paid less she and her husband, an optician, managed to get by on their combined incomes. Then the Fletchers decided to sell their home in Beaverton last year and move to a rural area near their relatives, about an hour away. That was when the trouble started.
To get top dollar for their 30-year-old split-level house the Fletchers decided to make a few upgrades. Since cash was tight, Fletcher used a credit card for $10,000 for new carpeting, fresh paint and a professional cleaning. She and her husband figured they'd recoup their costs once they sold their home. Unfortunately, the house sat on the market for nearly four months without an offer and ended up selling for $50,000 less than expected. Fletcher's 50-mile commute from her new home didn't help matters. With gas spiking to more than $3 a gallon, she once again found herself relying on her credit cards, racking up nearly $39,000 in debt and facing interest rates as high as 22 percent. She fell behind on one account, and the bank began calling her at home and at work. "It was horrible. I was anxious all the time," she says. "I knew if I couldn't find someone to help me I was going to have to file for bankruptcy."
It's an option that a growing number of consumers are facing. Despite the increased cost and inconvenience of declaring personal bankruptcy as a result of legislation passed three years ago, filings have jumped substantially in the last few months. More than 4,000 bankruptcy petitions were filed per day in March and April, on average, according to the bankruptcy data and management firm Automated Access to Court Electronic Records (AACER). That's up more than 30 percent from a year earlier and the highest number since the law went into effect. "There's a real sense of financial panic out there," says John Colwell, a bankruptcy attorney in San Diego who has seen his business increase 50 percent in the last year. "And I don't see it abating anytime soon."
What's happening? In some cases struggling homeowners are filing to prevent foreclosure. (A record high 243,353 homes went into foreclosure in April, according to data released on May 14 by RealtyTrac.) Squeezed by rising costs for everyday necessities like gas and groceries and unable to tap into their homes for temporary relief—declining values have left some people owing more than their homes are worth; it's also more difficult to get home equity lines of credit or loans—many people have turned to their credit cards "as a last resort," says Robert Lawless, a professor of law at the University of Illinois who follows bankruptcy trends. Once they max out their cards, they find it hard to keep up with payments. As banks tighten restrictions on credit, consumers are having a tougher time getting loans or new credit cards, and those who do are being charged higher interest on their balances. "People borrow to stave off the day of reckoning, and then when credit tightens, the bankruptcy numbers go up," says Lawless.
Lawless expects at least 1 million filings this year—an increase of 28 percent over last year. That's well below the approximately 1.6 million filings in 2004, the year before the law passed. But bankruptcy experts say the trend is worrisome, as the legislation makes it more difficult for consumers to prove they should be allowed to clear their debts and more expensive and cumbersome to go through the process. "If we're seeing this many people in bankruptcy court now, that tells me that there are a lot more people out there who are hurting very badly," says Lawless.
Credit counseling and debt management agencies are also reporting big increases in the number of inquiries over the past year. The nonprofit National Foundation for Credit Counseling (NFCC), which has more than 900 offices throughout the country, worked with about 2.5 million consumers last year—an increase of 15 percent over the previous year. Spokeswoman Gail Cunningham says the numbers have continued to rise this year (the group will release first quarter data later this month). Consolidated Credit Counseling Services Inc. founder Howard Dvorkin says his Florida-based nonprofit organization fields about 1,800 calls a day now—up from 1,000 a year ago—and, unlike in previous years, they're coming from consumers across all income levels. "You always saw people who were struggling, living off their credit cards," he says. "But what I see now are upper-middle and even upper-class people having the same problems."
The financial woes seem to be increasingly widespread geographically. The problems were once concentrated in areas like California and Florida, which have been hit hardest by foreclosures and plummeting home values. But bankruptcy filings are now up across the country, with sharp rises in the past few months in states like New Jersey, Ohio, and Oregon—where the number of filings has nearly doubled since January, according to AACER data.
And the numbers are expected to continue rising. The amount of outstanding consumer credit grew by $15.3 billion in March—more than double the increase a month earlier—to a staggering $2.56 trillion. A record-high $957 billion of that is revolving debt, like credit cards and home equity lines of credit. Could it be as bad as the mortgage crisis? Probably not, say experts. Though the amount of debt seems astonishing, the Federal Reserve Board's most recent Survey of Consumer Finances, published in 2006, found less than half of families (about 46 percent) carry a credit card balance, and the average owed is around $5,100. Most Americans are still able to pay their bills on time, says Liz Pulliam Weston, personal finance columnist and author of "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life." "I'm not one who thinks consumer debt could be the next subprime implosion," Weston says. Still, she cautions, "We've gotten people used to grabbing at the easiest fix … and it's very easy now to get into trouble."
Fletcher will attest to that. In the end she decided to go through a debt management program at ClearPoint, an NFCC member, instead of filing for bankruptcy. The agency was able to negotiate the interest rate down to about 9 percent on her debt, and in less than a year she had paid off more than $10,000 of the balance. Though the monthly payments were still high—she ended up carpooling with her husband, subbing regular coffee for her daily mocha and clipping coupons in order to save money—Fletcher says bankruptcy would have been worse. "This was tough," she says, "but I feel good that I'm handling it."
If economic conditions get much worse, there may be millions of others who can't.