"People are trying to free up cash so they have it on a daily basis," says Theodore W. Connolly, a bankruptcy attorney in Boston who has just published a new book on the problem, The Road Out of Debt: Bankruptcies and Other Solutions to Your Financial Problems. "People are getting fearful again and are worrying about just paying for their groceries and doing the laundry."
More People Fall Behind on Mortgage Payments...
The Mortgage Bankers Association reported Thursday that the percentage of mortgages that have fallen one month behind is growing. In the first quarter of 2009 the rate was 3.77%, which then fell to 3.31% by the end of that year. But in the second quarter of 2010, the number has gone up again to 3.51%.
"The rate of short-term delinquencies is going up and the increase in these short-term delinquencies may ultimately drive the foreclosure measures back up," said Jay Brinkmann, the association's chief economist.
Brinkman noted that 90-day delinquencies have actually declined from 10.06% in the first quarter, to 9.85% in the second quarter, but that was still above last year's second-quarter figure of 9.24%. He attributed part of the decline to the fact that some borrowers had negotiated loan modifications with their lenders.
...While Credit Card Balances Start to Shrink
At the same time, credit reporting company TransUnion reported that the average outstanding credit card balance was $4,951 during the second quarter, a decline of 13.4%. The delinquency rate on credit cards was 0.92%, a 17.2% drop from the first quarter.
"It's a reversal of tradition," says Jordan E. Goodman, a consumer finance expert and author of Master Your Debt: Slash Your Monthly Payments and Become Debt Free. "People used to pay their mortgages first and let their credit cards slide. But I'm hearing more and more that people are paying their credit cards first because they are going to lose their house anyway and they want to keep their credit card lines open."
One reason people are not as behind on their credit cards these days is that banks have cut credit lines by $2 trillion in the last year, leaving less room for them to get into trouble, he says.
Goodman says the fact that short-term mortgage delinquencies are rising indicates that, in the future, there are going to be more delinquencies. Even worse: 50% of the people getting mortgage modifications are re-defaulting on their loans. "They lowered their payments (in the modification), but it wasn't enough and they aren't able to make the payments because of a lack of income," he says.
A Boom in Bankruptcies
Connolly says the financial plight of the American consumer is illustrated in the soaring number of personal bankruptcies. For the one-year period ending in June, 1.5 million people had filed for bankruptcy, the highest level since 2005, when bankruptcy laws were tightened. Two million consumers filed for bankruptcy in 2005 in order to beat the deadline for the new rules.
"Even though the bankruptcy code was changed to make it a little more difficult to file, people are overcoming that and finding their way into bankruptcy because bills are piling up and debts are getting out of control for many people," he says.
Connolly advises people who are contemplating bankruptcy to pay their mortgages if they want to remain in their homes and not pay their credit cards. There is very little that the courts can do about a mortgage, but they can discharge unsecured debts like credit cards bills and medical bills in bankruptcy proceedings.