Bankruptcies -- Not Over Yet

Consumers seem to be growing more wary of credit-card debt, but personal filings probably won't drop until well after the economy revives

The consensus among economic forecasters is that the economy is close to bottoming out. Nevertheless, personal bankruptcies will continue to rise through the third quarter of 2002, according to a report from Morgan Stanley Dean Witter.

The number of bankruptcies follows roughly the same path as unemployment, observes Kenneth Posner, consumer credit analyst at Morgan Stanley and author of the study. "If people are losing jobs, they'll have much greater difficulty in keeping up with their bills," he says. The firm expects unemployment to peak at around 6.5% in the second quarter. Bankruptcies should probably top out the following quarter, at about 450,000 or so, a 29% increase from the third quarter of 2001.


  In some ways, this would not be as bad as previous downturns. From the peak to the trough of the past six business cycles, bankruptcies climbed by 60%, according to Posner. This time, he estimates, they may rise only about 50%.

Indeed, there is some evidence that, outside of auto loans, consumers are taking on debt at a slower rate. Revolving credit, a fair proxy for credit-card debt, grew only 5% in November, 2001, compared with a year earlier. That's far slower than its 12% growth at the end of 2000.

Nevertheless, banks may continue to be too generous with consumer loans. "Big credit-card companies are still mailing out millions of promotional credit-card offers with favorable interest rates," Posner says. These credit-card offers could backfire as more people lose their jobs, driving the bankruptcy rate even higher than expected.

By Margaret Popper

Edited by Michael J. Mandel

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