Consumer bankruptcies have already spiked more than 30% this year, and it looks like the trend shows no signs of flagging. The American Bankruptcy Institute predicts that the tally could hit 1.4 million by the end of the year. So, although there are some experts signaling that the economy is on the upswing, the downstream effects of bankruptcy on consumer spending and corporate balance sheets are going to make it difficult for the market to turn the corner.
In July, more than 126,000 people filed for bankruptcy protection, and the filing rate was up 36.5% for the first six months of 2009 relative to the same period in 2008. The problem is affecting every rung of the social ladder.
In addition to the legions of subprime borrowers who have been wrapped up in this crisis, actor Stephen Baldwin filed for protection in July, and Lenny Dykstra, former baseball player, made his play for bankruptcy as he owes between $10 and $50 million to creditors.
Banks are going to suffer just as much as consumers, though it may be difficult to feel sympathy for the institutions that wrote the loans. The sale of foreclosed property and loan settlements doesn't replace the value of what is owed, impairing banks' balance sheets. JP Morgan Chase (NYSE: JPM) CEO Jamie Dimon doesn't expect his company's credit card division to turn a profit this year or next. Third-quarter losses for its credit card portfolio could reach 10%, with subsequent results depending on unemployment.
For the second quarter, JP Morgan Chase saw its credit cards lose $672 million. In Q2 2008, the group turned in a $250 million profit. Home equity loan charge-offs hit $1.3 billion – up 4.61%, and prime mortgage defaults reached $481 million (3.07%). Last year in Q2, prime mortgage defaults amounted to only $104 million (1.08%).
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