About 11% of these households have declared bankruptcy at some point. Some analysts have questioned whether these individuals will have sufficient retirement funds to retire.
The fact that Americans have debt is no surprise: Americans use credit cards to finance our purchases (big and small). We use car loans to pay for our vehicles, we get student loans to help us pay tuitions, and we obtain home loans to buy our homes. Yet the size of our debt can seem overwhelming. According to the Department of Commerce, the total debt is nearly $10 trillion, nearly doubling the amount in 1992, even after inflation adjustments. American household debt today is equal to over 80 percent of the national economy, increased from about 60 percent in the early 1990s. Filings for bankruptcy have also soared.
Six out of every 1,000 persons in the U.S. filed for bankruptcy in 1991. In 2001, the bankruptcy rate increased to 9 out of every 1000 U.S. adults. Consumer bankruptcy filings surged to a record high in 2005 due to the bankruptcy law changes. Bankruptcy filings skyrocketed 31.6 percent to over 2 million last year. That equates to about one in every 53 households filing for bankruptcy. In 2005, the new bankruptcy laws went into effect, making it more difficult for consumers to demonstrate they should be allowed to eliminate their debts in with a Chapter 7 bankruptcy clean slate. Chapter 7 filings increased over 47% percent in 2005.
Are Baby Boomers and other future retirees really going to be in trouble? As indicated previously, the common concern is whether these individuals will have the money to make their current debt payments required by their creditors as well as future debt payments. These households are facing many risks which could create financial challenges. One such risk is their adjustable rate loan (ARM's) payments which depend directly on short-term interest rates. If these interest rates continue increasing, U.S. households with ARM's will see their debt payments increase in the near future.
A sharp decrease in real estate values which we have seen recently, would reduce home equities and overall net worth. This will limit access to additional credit. This potential risk is especially important for the Baby Boomers because their home equity represents a vital amount of their wealth holdings total.
Suze Ortoman (http://www.imnotbrokeanymore.com) is a freelance writer and has devoted most of her career to helping families make money, reduce debts, and save money. She has researched the areas of personal finance, investing, home mortgages, and others. Her most recent research is in the areas of social security, medicare, and retirement.
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