The state of American household credit, simply put, is not great. While some households have managed to hold on to the cash reserves they built up during the pandemic, a growing number are falling behind on credit cards and car payments. Texas, a prominent example, is slipping at a worrying pace, as highlighted in the Federal Reserve’s June household debt report. The state is grappling with a staggering per capita car loan balance of $7,770 – far above the national average of $5,600.
The reason why so many households are finding it harder to pay regular monthly bills on time? A rapid increase in auto loan balances and credit card debts. Over the last three years, the average car payment has skyrocketed to over $750, with loan terms approaching 84 months. Furthermore, credit card debts have soared past $1 trillion for the first time in history. This surge presents a monumental problem for American households.
Signs of Distress: The Last Maxed Credit Card
As I mentioned in a previous article, many households won’t show signs of distress until their last credit card is maxed out. The reasoning is straightforward: if you don’t have enough income to make ends meet, you can still meet your obligations by borrowing – deficit spending. However, when the last credit card is maxed and there's no more access to additional credit, households can't sustain their monthly bills. At this point, something has to give.
The Usual Advice: Payment Plans
When you're behind on car payments or credit card bills, the standard line of advice is to call the creditors and arrange a payment plan. Good luck with that! This approach might work for households that missed a payment due to a one-time unexpected expense, but it doesn’t help those falling behind because they can’t afford the bills. If this is your situation, you generally have two options: cut household expenses or earn more money.
Making More Money: A Viable Option?
Making more money might not be a wild idea. With 9 million job openings in the United States, if you've been in the same job for years without a pay raise, it might be time for a change. This shift could be the catalyst to move into a higher income bracket.
Cutting Expenses: Every Bit Helps, But Is It Enough?
If earning more isn't feasible right now, you have to cut your expenses. Skip Starbucks. Opt for your boss’s coffee and pack a lunch. To illustrate: a regular sandwich and a Coke at a fast-food chain recently cost me $16! Foregoing these expenses can save you over $300 a month. However, for many of my clients, these cuts are too little, too late.
When Cutting Costs Isn’t Enough: Enter Bankruptcy
If you’ve already tightened your belt and still find yourself behind, it’s time to consider talking to a Bankruptcy Attorney. It's remarkable how little the average person knows about bankruptcy laws. We can potentially lower your car payment, help you keep the car, and eliminate your credit card debts.
A Real-Life Scenario: Meet John
Let me give you an example: I recently consulted with a client—let's call him John—who was two months behind on his car payment and at risk for repossession. John works full-time and brings home $1,500 every two weeks. Here are his numbers:
Rent: $1,400
Owed: $17,000 on a 2016 Hyundai Elantra (worth $10,700)
Car Payment: $525
Credit Card Debt: $18,000 (with a monthly payment of $450)
Payday Loans: $2,000 (with a payment of $250)
Total Monthly Payments (besides rent): $1,225
This budget leaves John with a mere $625 to cover utilities, cell phone, food, gas, clothing, medical expenses, etc. Clearly, there’s no belt-tightening that will work in this case.
The Bankruptcy Solution
For John, we filed a Chapter 13 bankruptcy. This move lowered his car balance to $10,700 and eliminated his other debts. His total new monthly payment dropped to $300, leaving him with $1,550 for his living expenses. Plus, he will be out of debt completely in 4.5 years. For individuals like John, the standard advice is destined to fail.
It’s Time to Break the Cycle
I’m relieved that John reached out to us before spending years trapped in this vicious cycle. For many Americans, bankruptcy can provide the legal protection they need to regain financial stability.
Closing Thoughts
If you're sinking under a mound of debt and struggling to keep up with your monthly obligations, it's important to recognize that you have options. As a bankruptcy attorney with DebtStoppers, I have seen firsthand how the law can help individuals and families regain their financial footing and break free from the burden of overwhelming debt.
