consumer credit

Increase in Consumer Spending Expressedin Borrowed Dollars

How can we cheer the fact that more Americans are going deeper into debt?  That is exactly what the news is doing in trumpeting increased consumer spending.  The American Bankruptcy Institute provides a summary and link to further information.

CONSUMER CREDIT SURGES BY MOST SINCE 2001

U.S. consumer credit surged 10 percent in November, its biggest jump in a decade in a positive signal for the economy as consumers tapped their credit cards and the government doled out more student loans, Reuters reported yesterday. Outstanding consumer credit increased by $20.37 billion during the month, the Federal Reserve reported yesterday. Revolving credit, which mostly measures credit card use, rose $5.60 billion, a third straight monthly increase. The increase in consumer credit was the 13th in 14 months and the biggest jump since creditors boosted lending in the wake of the September 11, 2001, attacks in New York and Washington. Nonrevolving credit, which includes student and auto loans, rose a seasonally adjusted $14.78 billion in November. Read more.
 

Credit Scores and Bankruptcy / Foreclosure / Short Sale

I am often asked whether the impact on one's credit score is dramatically different if one chooses to file bankruptcy, allow a home to go to foreclosure, or to sell a home through a short sale.  Bills.com has an article from April of 2011 describing information provided by Fair Isaac & Company (the owner of the FICO score formula).  As always, linking to this information or discussing it does not constitute legal advice.  I am not suggesting that you rely on this information. Seek legal counsel before making decisions that affect your credit score.

The information provided by Fair Isaac & Company indicates there is not a significant difference.  The full Bills.com article provides more background. The following table is from Bills.com which provides the source as Fair Isaac & Co.

Harm to FICO score

Consumer A Consumer B Consumer C
Starting FICO score ~680 ~720 ~780
FICO score after these events:
   30 days late on mortgage 600-620 630-650 670-690
   90 days late on mortgage 600-620 610-630 650-670
   Short sale / deed-in-lieu / settlement (no deficiency balance) 610-630 605-625 655-675
   Short sale (with deficiency balance) 575-595 570-590 620-640
   Foreclosure 575-595 570-590 620-640
   Bankruptcy 530-550 525-545 540-560

Time to Full Recovery

Consumer A Consumer B Consumer C
Starting FICO score ~680 ~720 ~780
FICO score after these events:
   30 days late on mortgage ~9 months ~2.5 years ~3 years
   90 days late on mortgage ~9 months ~3 years ~7 years
   Short sale / deed-in-lieu / settlement (no deficiency balance) ~3 years ~7 years ~7 years
   Short sale (with deficiency balance) ~3 years ~7 years ~7 years
   Foreclosure ~3 years ~7 years ~7 years
   Bankruptcy ~5 years ~7-10 years ~7-10 years

As you can see, there is sigifican overlap between categories and types of sales or financial action.  For example, someone starting with 720 credit who sells a home short with a deficiency might have a FICO score of 580.  That same person, emerging from bankruptcy, might have a FICO score of 535.  Under both circumstances, it takes seven years for the individual's credit to recover (and it might take an additional three years for a credit score recovery under a bankruptcy).

Is it worth preserving 45 FICO points to work for months--perhaps a year or more--to short sell a home?  Do the added advantages of bankruptcy (elimination of other unsecured debt, for example) outweigh that small point difference?  That is a question each person facing the situation must consider and weigh. 

Depressed Americans: The State of the Economy

I am reproducing another interesting update from the American Bankruptcy Institute:

ANALYSIS: AMERICANS REMAIN DEPRESSED DESPITE ECONOMIC GAINS

A rift is emerging between Americans' state of mind and the state of the economy, the Washington Post reported today. The economy is growing stronger, with the nation's gross domestic product growing at its fastest clip so far this year. The number of new people signing up for unemployment benefits has steadily declined, and consumer spending is rising. But by almost any measure, Americans remain unhappy. Consumer confidence has plunged to levels last seen during the financial crisis. A recent Nielsen poll found that nine out of 10 Americans believe the country is still in recession. "It's the hangover from the Great Recession," said James Russo, vice president of global consumer insights for Nielsen. "People feel the economy not at the macro level but at the micro level." This persistent pessimism has perplexed economists. Most of the time, our emotions and our actions move in tandem. But the gap between the two has widened since the financial crisis. Economists say something will have to give: Either Americans will perk up or, more worrisome, the recovery will conform to our low expectations. Lynn Franco, research director at the Conference Board, said consumers have been beaten down too long to be impressed by recent blips of economic good news. According to conventional theories, depressed consumers spend less money, slowing down economic growth and further eroding confidence in a vicious cycle of decline. Typically, our attitudes are merely reflections of major sectors of the economy, such as the job market or stock prices. But during changes in business cycles — from recession to recovery, for example — consumer confidence can provide a crucial nudge, said Mark Zandi, chief economist at Moodys.com. Read more.
Is the "recovery" a phantom recovery for many?  Does the data trumpeted by the media not reflect reality on the ground?

If you need help in bankruptcy, contact Ventura and Oxnard Bankruptcy Lawyer Andrew Mansfield.

Fed: Consumer Credit Use Up in September

It appears that the increased "recovery" in the last month is due to more borrowing.  I remain skeptical whether that is a path to recovery given the pain credit use has inflicted on so many.  Will this type of increase lead to increased filings for bankruptcy protection down the road?  From the American Bankruptcy Institute:
Fed: Consumer Credit Use Up in September
Consumer credit grew by $7.39 billion in September after falling a revised $9.68 billion in August, boosted by a category that includes student and new-car loans, a Federal Reserve report on Monday showed, Reuters reported yesterday. Revolving credit, which mostly measures credit-card use, fell $627.1 million—a third straight monthly decline after drops of $2.26 billion in August and $3.40 billion in July. Non-revolving credit, which includes auto loans, rose $8.01 billion in September after a revised $7.42 billion decrease in August. Analysts said the rise in non-revolving credit partly reflected an accounting change seen since mid-2010 that stems from health care reform and student lending having moved away from banks and toward direct lending from the federal government. The broad trend in revolving credit over the past three years has been toward reducing credit card use as consumers seek to pay down debt, or deleverage. In the 36 months since September 2008, revolving credit has risen in just four months and has been paid down in 32 of those months. Read more.
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