Consumer Debt Looks Set to Keep Soaring

Mired in this debt quicksand, consumers are getting themselves into trouble. More than 1.5 million bankruptcy filings were recorded over the last 12 months. Through the second quarter of 2002, data from the Mortgage Brokers Association of America showed that foreclosures accounted for four out of every 1,000 homes, a level unseen in the 30 years the MBAA has been tracking the data. And seriously delinquent loans, those well past due and on their way to foreclosure, now account for 5% of all loans -- levels unseen since the last recession.

"Three million people have gone through bankruptcy in the last 24 months," said Harvey Warren, president of the National Consumer Council, a nonprofit consumer advocacy group. "The data literally ensure that 2002 will set records, shattering last year's total. Next year will be more of the same."

The Good News

But while debt levels continue to rise, there's little in place fiscally to make consumers stop spending, and that will be a boon for the economy in 2003. The powerful combination of Federal Reserve cuts to short-term interest rates, widespread availability of credit and low prices on everything from new cars to clothing will keep consumers driving economic growth.

Unemployment recently rose to 6%, a small number from historical perspectives. And wages are rising steadily. Mortgage rates hover near four-decade lows, and that will drive home sales and refinancing. If corporate spending increases while consumers toe the line, the economic outlook for 2003 is brighter than it's been since the go-go 1990s.

With Republicans in control of Washington, consumers will get a small boost from the Bush administration's proposed tax cuts, which will certainly aid those with the deepest pockets. Experts also expect Congress to finally pass the long-awaited bankruptcy overhaul bill, which many banks believe will put the stigma back on individual bankruptcy and encourage fiscal responsibility.

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So while debt is rising, efforts are being made to usher in some constraints. Under the overhaul bill, would-be bankruptcy seekers must undergo a means test to weed out the uber-rich, who have been known to use Chapter 7 bankruptcy protection to avoid paying their exorbitant debts. Also, anyone who seeks bankruptcy protection, regardless of income, must undergo financial counseling.

"I'd say 2003 could be the year for bankruptcy reform, with a Republican Congress and a Republican president" said Mike Croxson, president of Amerix, which provides technology to the debt-management industry. "Ultimately, it might not stop all the filings, but it's a good effort."

While 2003 may set another debt record, credit counselors say that consumers are quietly growing concerned about their finances. In a survey from the Million Dollar Roundtable, 56% of Americans say they will make a New Year's resolution to get out of debt. "There are loads of people who want to deal with this. I'm getting dozens of calls every single day," said White. "But most people aren't scared enough yet."