Personal Bankruptcies Rise as Debt Falls

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Call it a tale of two statistics.

While personal bankruptcies are on the rise – significantly – the Federal Reserve says that American consumers are paying down their revolving debt. In the spirit of the holiday season, let’s examine how to speed up the process on the latter so you don’t fall victim to the former.

For the record, personal bankruptcies are up by 1,222,589 through the first nine months of 2010, according to the American Bankruptcy Institute – that’s 11% more than the same period in 2009. Of that number, about 65% of bankruptcy filers cited “income reduction’ as the reason, while another 42% cited “job loss."

The rest of the year doesn’t look any better.

“As the economy looks to climb out of the recent recession, businesses and consumers continue to file for bankruptcy to regain their financial footing,” said ABI Executive Director Samuel J. Gerdano. “With unemployment hovering near 10% and access to credit remaining tight, total filings in 2010 will likely exceed 1.6 million.”

There is some good news on the personal financial front for consumers though: The Federal Reserve reports that Americans are doing a much better job of paying down their revolving credit debt.

The numbers show that revolving credit card debt was reduced from $822.2 billion in August to $813.9 billion in September.

That doesn’t mean the bankruptcy problem is going away. Some financial experts see bankruptcy filings rising as long as unemployment remains high. “I expect bankruptcy filings to continue to rise in the coming months as unemployment holds near 10% and access to credit remains tight. Debt levels, underwater mortgages coupled with the high number of jobless continues to pose a serious risk to the financial health of Americans,” says Howard Dvorkin, debt analyst and founder of Consolidated Credit Counseling Services, Inc.

What steps can consumers take to avoid bankruptcy? One almost surefire way to do that is to pay down debt as fast as possible. That means confronting debt problems head on, and developing a solid plan to cut it down to size.

Dvorkin and Consolidated Credit offer some helpful steps to get that debt reduction program started:

  • Contact creditors before getting deep into debt.  Most creditors will work with consumers if circumstances such as a job loss, divorce, or illness have made it temporarily difficult for them to meet financial obligations.
  • Eliminate credit cards and start living strictly on cash.  Living frugally allows consumers to accumulate less debt and pay current debts down faster.
  • Track spending and keep an up-to-date budget.  After seeing where money is being spent, people can decide where to cut back and use that extra cash to pay down debt.
  • Make sure you’re adequately covered by insurance, including medical, homeowners, and auto insurance.
  • If you get a raise or a bonus at work, use it to pay down debt. There’s no law that says you have to spend your raise.
  • Avoiding bankruptcy is so much easier if you have a good grip on your debt situation. The faster you pay it down, the further bankruptcy falls away.

Check out MainStreet's list of the five signs you're headed for bankruptcy.

— For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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