While the American economy has not yet fully recovered from the Great Recession, according to recently-released data the amount of personal bankruptcies filed in 2011 dropped for the very first time in four years. This is ultimately a good sign for how consumers are handling their credit cards debt.
Michael Dean, the managing director of asset-backed securities for Fitch Ratings Inc., claims that 20% to 30% of all credit card charge-offs are generally driven by bankruptcy filings, as reported by online news source Collections & Credit Risk.
This means that when bankruptcies are occurring at a heightened rate due to unfavorable economic circumstances, credit card issuing companies tend to suffer much higher losses as a result. The vast majority of charge-offs occur when consumers do not make payments towards their credit card debt for six months in a row, which leads their lenders to have to write off those accounts as losses.
Last year`s decline in bankruptcies can be credited to country-wide economic conditions that are “marginally” better combined with decreased consumer spending. In fact, consumers across America have reeled in their spending significantly ever since the start of the recession and have been focusing on ridding themselves of debt during the past few years.
The positive trend in bankruptcies does not indicate, however, that all consumers are ready to pull out the wallets and begin spending once again. While there has been a slowing down of job losses causing unemployment numbers to improve and a record-low level of charge-offs, there is, as yet, no core indication of economic growth.
“There are some conflicting signals out there,” said Dean, according to Collections & Credit Risk. “While overall consumer credit health continues to improve, there is not much to base a forecast on. So it is hard to tell what the next year will look like.”
This does not alter the fact that in 2011, credit card issuers enjoyed a respite from charge-offs fueled by bankruptcy filings. Last year the total amount of U.S. bankruptcies dropped 11.9% from the 2010 number. And, according to Lundquist Consulting Inc., a company based in Burlingame, California, that is the first decline seen since 2006.
In the year 2005, bankruptcies exploded across the United States in anticipation of the implementation of a new bankruptcy law that made it more difficult for an individual to declare bankruptcy.