Rising Personal Bankruptcies

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America's middle class has been waiting for a strong economic revival for four years now. By December 2004, there were still fewer jobs than at the start of the recession in March 2001. Family incomes had fallen for three years in a row through 2003 and wage growth fell behind inflation in 2004.

At the same time, families experienced sharply higher costs for education, energy, housing, and health care, putting household finances in a bind. Importantly, many families faced rising costs for the debt that they have piled up amid a comparatively weak labor market. With higher interest rates, this debt could quickly become more burdensome. Starting in June 2004, the Federal Reserve began to raise interest rates.

The combination of modest income growth and rising costs has already taken a toll on America's middle class. By 2003, the personal bankruptcy rate reached a record high. Across the country, a number of states showed disproportionately high incidences of personal bankruptcy. The divergence in personal bankruptcies shows that economic distress is more closely connected to slow income growth than to other factors. Recently, personal bankruptcies have become more closely associated with job loss than in the past, and they have remained sensitive to the lack of health insurance coverage. The situation since 2003 suggests that further increases in personal bankruptcies are possible as prices have risen further amid a continuously weak labor market.

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Christian E. Weller is a senior economist at the Center for American Progress and Alanna Gino is an economic policy intern at the Center for American Progress.