U.S. household debt dropped to $13.4 trillion in 2010, according to information released by the Federal Reserve on Thursday. While household debt hasn’t been this low in six years, the report shows a large reason for the drop in debt was not due to paid bills, but instead loan defaults and write-offs.
Household Debt Burden Lowest Since 2004
The report found that the amount of debt carried in 2010 averaged 116 percent of disposable income, which represented a reduction in the peak debt burden in 2007 of 130 percent. Even better, last year’s level of debt hadn’t been seen since 2004 and was the second consecutive year that debt was reduced.
According to the report, the decrease in debt moved the average household net worth to $505,000 at the end of the year. While this number is well below the peak of $595,000 seen in the second quarter of 2007 (right before housing prices plunged), it still represents a 5.1-percent increase over 2009.
Families Reduce Debt by Default
While the debt reduction has been partially attributed to scrimping on expenses, the report found that a large portion the reduction has more to do with loan defaults.
Consumers defaulted on mortgages, credit cards and other types of loans. As a result, commercial banks wrote off $118 billion in consumer debt–over half of the total $208.8 billion drop in household debt. This means while the reduction seemed to show consumers paid their bills, families were actually in a great deal of financial stress.
Good news found in the report, however, is individuals looking to reduce their debt have started increasing the amount of income used to contribute to debt reduction. And those who have managed to clear a large portion of their burden are now adding more to their savings accounts.
If you have found that your own debt has become overwhelming, most experts recommend you don’t walk away from it. Instead consider debt consolidation or other options to correct the issue.
