New Bankruptcies Dip to Record Low Amid Federal Relief

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By some measures, households in the United States have never been more financially healthy, according to a new report by the Federal Reserve Bank of New York released Tuesday. The report showed a record low number of new bankruptcies and foreclosures, but these strong statistics come with a major caveat.

There were 131,840 new bankruptcies in the whole country in the third quarter, a historic low and 35% below pre-pandemic levels, the quarterly Household Debt and Credit Report said. The number of new foreclosures dropped to 16,020, about 78% below the fourth quarter of 2019, and a record low since the Fed started keeping track in 1999. Overall delinquencies fell slightly from the month before, staying below pre-pandemic levels, with only 3.4% of all debt in some stage of delinquency, down 1.4 percentage points from last year. However, Fed researchers said forbearance programs provided by the government and private lenders were responsible for keeping many borrowers afloat.

“Balances and delinquency rates across debt products remained largely stable in the third quarter,” Donghoon Lee, a research officer at the New York Fed, wrote in a research note. “The data likely reflects improvements in economic activity and the labor market, as well as the positive impacts of temporary relief measures provided through CARES Act provisions or offered voluntarily by lenders."

The CARES Act pandemic aid bill, passed in March, offered several forms of relief for distressed borrowers by creating a forbearance option for federally-held mortgages and student loans. Private lenders, encouraged by regulators, also offered forbearance programs.

The report also showed positive news about household debt overall, as total debt increased by $87 billion, partly due to an $85-billion increase in mortgages as people took advantage of low interest rates and ramped up homebuying and refinances, taking out home loans at a level not seen since 2003. Consumers also took out a record $168 billion in new auto loans. Meanwhile, total credit card balances declined by $10 billion, reflecting weak consumer spending and cardholders paying down their debts, said the report, which is based on data from the New York Fed and the Equifax credit bureau.

Economists, however, are waiting to see what happens when forbearances begin to hit their one-year expiration dates.

“The way consumers are weathering this recession has been an important policy discussion, particularly as the cash transfers to households provided by the CARES Act have ended and the forbearances are set to expire,” Fed economists wrote in a blog post commenting on the report. “How households will endure the ‘fiscal cliff’ is of significant interest, and we will closely monitor the ability of borrowers to maintain debt payments, especially among borrowers rolling off forbearance as the COVID-19 crisis evolves.”

Article Sources

  1. Federal Reserve Bank of New York. "Household Debt and Credit Report (Q3 2020)." Accessed Nov. 17, 2020.

  2. Federal Reserve Bank of New York. "Total Household Debt Increased in Q3 2020, Led by Surge in New Credit Extensions; Mortgage Originations, Including Refinances, Continue to Soar." Accessed Nov. 17, 2020.

  3. Federal Reserve Bank of New York. "Quarterly Report on Household Debt and Credit." Accessed Nov. 17, 2020.

  4. Federal Reserve Bank of New York. "Liberty Street Economics: Following Borrowers Through Forbearance." Accessed Nov. 17, 2020.