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Credit card debt discharged through bankruptcy

It appears that the need to file for bankruptcy due to the recent recession actually produced a surprising by-product: An overall decrease in credit card debt. This information was revealed in a recent study produced by the Federal Reserve.

In detailing the results of the study, the Federal Reserve noted that the percentage of families using credit cards between 2007 and 2010 dropped considerably. At the same time, the median account balance dropped 16.1 percent.

However, this positive news regarding credit card debt accompanies more grim news regarding the financial downfall of the average American family. Between 2010 and 2007, the median family income declined 7.7 percent. At the same time, median family net worth dropped 38.8 percent.

In 2007, more than 46 percent of families carried credit card debt. But by 2010, that number had dropped 6.7 percent, while the median balance declined from $3,100 to $2,600.

When looking at how credit card debt declined while income and net worth also declined, sources point to the fact that many Americans had their debts discharged by filing for consumer bankruptcy. And, as consumers turned to bankruptcy to wipe away existing debts, lenders tightened their belts and became much more particular about which consumers they issued credit cards to. This resulted in the overall decline in active credit cards.

Looking to the future, now that many have had credit card debt wiped away through bankruptcy, many consumers now have a better shot at bouncing back from these past few years, which have been financially difficult for many.

Source: NPR, “Credit Card Debt Cut: The Reason May Surprise You,” Marilyn Geewax, June 12, 2012

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