Study: Bankruptcy filings caused drop in credit card debt

Recently, the U.S. Federal Reserve released a study containing two pieces of information that seemed to completely contradict one another. First, the study found that the average American family experienced a drop in income and net worth during the recession. But the study also found that credit card debt also fell sharply during that period. So how were American families able to pay down their debt if they were dealing with a significant drop in income and wealth?

The answer, according to the study, is revealed in one additional piece of information: there was a significant increase in bankruptcy filings during the recession. Not only did this cause the drop in credit card debt by discharging a significant amount, but it also made credit card companies tighten up their restrictions around who could open up new accounts.

In 2007, the study found, 46 percent of families held a median credit card balance of $3,100. In 2010, just under 40 percent of families held a median card balance of $2,600.

At the same time, wealth significantly dropped throughout the country. Median family income fell by nearly 8 percent, dropping from $49,600 in 2007 to $45,800 in 2010. Similarly, median family net worth fell by a staggering 38.8 percent, down from $126,400 in 2007 to $77,300 in 2010.

So despite the illusionary aspect of the decline in credit card debt, there is one thing that everyone seems to be in agreement upon. The elimination of debt is a positive step for American families and for the economy, both of which are still struggling to recover and rebuild in the wake of the recession.

Source: NPR, “Credit Card Debt Cut: The Reason May Surprise You,” Marilyn Geewax, June 12, 2012