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  Chapter Nine:

  Average Earnings
  Minority Earnings
  Average Incomes
  Personal Consumption
  Philanthropic Donations
  Personal Debt
  Income Distribution



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Personal Debt

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The ratio of personal debt to personal income reached a peak in the 1990s. The bankruptcy rate climbed slowly after World War II and more rapidly during the last two decades of the century.
The ratio of the aggregate debt owed by individuals to the aggregate income received by individuals was relatively low in the early part of the century. It rose to a then-unprecedented level of .52 at the depth of the Depression in 1933, and then declined until 1945. By 1960, the ratio exceeded that of 1933, and in the last two decades of the century, it rose to record levels. 

The 1998 ratio of 0.9 signifies that the total debts owed by individuals were close to their total annual incomes. At more than $7 trillion, personal debt exceeded the federal debt by a considerable margin. 

Approximately three-quarters of this personal debt represented residential mortgages, most of them long-term and borrowed at moderate interest rates. The effective interest rate was even lower because mortgage interest is deductible from taxable income. 

The remainder of the debt burden was composed of short-term consumer credit and home equity loans. Earlier in the century, retail merchants and service suppliers carried consumer credit accounts and installment purchase loans at nominal or no interest. In the last two decades of the century, most credit of this type was offered through credit card companies. Home equity loans, an innovation of the 1980s, represented a small but growing fraction of consumer debt, at rates substantially lower than those charged by credit card companies. 

The lower chart shows all bankruptcies—municipal, corporate, farm, nonprofit, and individual—but most bankruptcies were individual. The quadrupling of bankruptcies in the last two decades of the century is partly attributable to the liberalization of the law under the Bankruptcy Reform Act of 1978 on the one hand, and to credit card debt, medical costs for catastrophic conditions, and legalized gambling on the other. Beginning in the 1980s, credit card lenders abandoned traditional measures of creditworthiness in exchange for high interest rates on revolving card balances. During the same period, legalized gambling became available throughout the United States. Both of these developments encouraged some consumers to accumulate debts they could not repay, and bankruptcy offered them a fresh start. At the same time, a booming economy led to more business startups, some of which failed and went to bankruptcy court (see page 246).

Chapter 9 chart 6

Source Notes
Source Abbreviations

HS series F 8, F 393, and F 413; SA 1974, table 744; SA 1979, table 877; SA 1988, tables 678 and 817; SA 1998, tables 721, 816, and 817; and SA 1999, tables 820 and 824. For home equity loans, see CB, “Home Equity Lines of Credit—A Look at the People Who Obtain Them,” Statistical Brief SB/95-15 (1995).


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