Personal Bankruptcies Rise 35%

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Home foreclosurePersonal bankruptcies rose 35% in March over February to 158,000, according to the Automated Access to Court Electronic Records. According to The New York Times, that was the highest monthly level since new bankruptcy laws went into effect in October 2005. Automated Access to Court Electronic Records reported earlier that personal bankruptcies were up 32% last year.The Times also writes, "Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages."

The figures show that unemployment has taken its toll on people's ability to pay their debts and stay in their homes. This is bad news for bank earnings because financial firms are forced to write-off the credit card balances of customers that default. Bankruptcies often cause people to lose their homes, which in turn puts more relatively low-price inventory on the housing markets helping to keep housing prices low.

What is not as obvious is how the bankruptcies will affect future consumer spending. People who declare bankruptcy often can't get access to credit for years, and must pay cash for all of their purchases. Without credit cards it's harder for people to make purchases that they can pay for over time.

Bankruptcies, if they continue at their current clip, could undercut the consumer spending population by well over a million people this year after doing the same last year. That's a lot of people who won't be buying big ticket items at shopping malls or in car dealerships.The same people will struggle to buy new homes. And the domino effect of that is a drag on GDP.
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