According to a Federal Reserve report, household debt decreased at an annual rate of .75 percent during July, August and September 2008. Consumer debt fell from $13.94 trillion to $13.91 trillion within a 3-month period. This is the first time consumer debt declined during a 3-month period since the Federal Reserve began tracking consumer debt in 1952. But if you were thinking that this decline in debt would be partnered with an increase in net worth, you’re wrong, household net worth also declined by $2.8 trillion, the largest decline on record.
As more and more Americans lose access to credit, face foreclosure and face bankruptcy their household debt will actually decrease. But this decrease in debt is not because everyone is paying off their loans and credit cards it is often because families are discharging debt in bankruptcy. Also, because credit access is currently restricted, new debtors are not being added to the balance sheets of credit cards companies and mortgage servicers, thus causing the reduction in household debt.
The dangerous part of this equation is the decrease in household net worth. This decrease in net worth is often caused by families allowing debts to destroy their assets before filing for bankruptcy. For example, many families lose their biggest asset, their home to foreclosure because they fail to act quickly using bankruptcy to save their home. To avoid decreased net worth debtors need to use tools such as bankruptcy to protect their assets.