A University of Iowa professor’s study concludes up to one-quarter of the Americans who filed for personal bankruptcy in 2007 wouldn’t have been in that predicament if the credit limits of three decades ago were still in place. Sociology professor Kevin Leicht, says he was surprised by how much additional debt Americans have been able to acquire since the credit regulations of the 1970s were lifted.
“If you looked at these people that were near bankruptcy and attempted to figure out how many of them probably wouldn’t have been able to borrow that much money to end up in bankruptcy in the ’70s, the number is pretty stark,” Leicht says. In the 1970s, a person couldn’t get a mortgage that was greater than 30% of his or her income — or get a car loan that required monthly payments of more than 10 percent of their income.
Leicht says what happened over the past two decades is that many of the banks making home and car loans immediately sell that loan on the open market, so the original lender isn’t on the hook and, therefore, disconnected from the borrowers’ ability to pay off the loan. “We need to return to some system where people should be loaned money on the basis of their ability to pay it back,” Leicht says.
Leicht’s advice is to set some of your own, personal borrowing rules and stick to those limits. “People were used to a system where a bank would tell you when you couldn’t afford a loan and it wasn’t in your best interest to take it,” Leicht says, “and we eventually moved to a system where a bank wasn’t about to tell you that, so you have to figure it out yourself.”
Leicht says if the credit regulations of the 1970s were still in effect, many of the Americans who’ve filed for bankruptcy wouldn’t have accumulated as much debt, because it would have been illegal for banks and credit card companies to loan that much money to an individual.
Leicht’s study is part of a new book titled, “Broke: How Debt Bankrupts the Middle Class.”