So, the current economic outlook is not good. While that might not come as surprise, some of the numbers are truly staggering. Now that we have come out of the Covid-19 pandemic, certain realities are starting to take shape.
During the pandemic, surprisingly people actually were able to accumulate savings and reduce debt overall, however, a recent study conducted by the Federal Reserve of San Francisco showed that most households on track to deplete those savings within the next month or two. In addition, to the New York Federal Reserve, during the 2nd quarter of this year, total credit card debt surged to $1.03 trillion dollars, which is the highest level of American credit card debt since 2003.
Inflation is also hurting consumers. According to Investopedia, the typical costs of servicing household debt in 2023 has risen by $691 per month. For example, a new mortgage that had a monthly payment of $1,538 in early 2022 has risen to $2,135 per month for the same mortgage in mid-2023. As a practical matter, that means that if you bought a home with the median national price of $410,200 today, you would be spending an additional $225,679 in interest over the life of the loan as compared to the same house and the same loan from last year.
All of that will have downstream impacts on the economy. As a practical matter, what that means for the average consumer is that there will be months were you simply can't make it without some sort of outside infusion of money and oftentimes that will take the form of credit card usage.
Now credit cards, in and of themselves are not evil, but they are extremely high interest loans and they must always be treated as such. Much the same way that a casino uses chips instead of cash to distract you from realizing how much money you are losing at the gambling tables, credit cards make it easy to engage in high interest loans without feeling like you are selling out your financial future.
If you went to a bank to get a car loan and the banker said, “I've got a car loan for 22% interest”, most of you would laugh at that offer, but when you take out credit cards, you are doing that exact same thing.
Having been a Bankruptcy attorney for over twenty years, I've seen a few of these economic slumps, and typically this is the time period were people are trying to make it on their own, hoping something will turn around in the short term, and so rather than try to get their monthly budget back on track, they turn to credit cards to fill in the gap.
Unfortunately, this is usually putting off the inevitable. The problem for your Bankruptcy attorney is that certain credit card transactions prior to the filing of the Bankruptcy can absolutely invite trouble into your case. Cash advances (where you take a credit card and put it into an ATM machine, or cash a convenience check mailed by the credit card company) within a short period of time are a big problem. The traditional time frame is 70 days, but as a practitioner, I don't like to see cash advances from my Bankruptcy clients within 6 months of the Bankruptcy filing. Purchasing luxury goods and services are another potential source of problems. Sometimes, you just need to go out of town, and oftentimes you finance that trip and its purchases on a credit card. The credit card companies have software that will analyze your spending habits and determine whether you have engaged in transactions that could be worth a non-dischargeability action in Bankruptcy. I understand people pumping gas or buying groceries with a credit card, but ultimately this is not a serious solution to your problems.
The bottom line is that as we go into serious economic times, your credit cards should not be seen as a solution, or even a band-aid to the problem. If you ultimately can't pay back your credit cards with your current budget you need to be seeing a Bankruptcy attorney for their analysis prior to using the credit cards to buy you another month of relief, because ultimately you might be hurting your chances of successfully eliminating your debt and getting a fresh start.