Managing debt

Before the recession, people in the United States were up to their eyeballs in debt. For many, job losses and failing investments made that debt impossible to keep. Are households in better shape today? N.C. State University economist Mike Walden answers.

“Well … you’re absolutely right: Pre-recession households, other holders of debt held record levels of debt by virtually any measure — dollar measure, ratio to assets, ratio to income. And then came the recession. And what the recession did is plunge not only household income, as unemployment went up, but also asset value, stock market crash, housing market crash, et cetera.

“So, over the last really five years American households, other holders of debt, have had to pay down on their debt. They simply couldn’t hold that level of debt. And indeed they’ve paid down $1.2 trillion — trillion — of debt.

“That means all the measures of debt are down — debt to income ratio, debt to asset ratio. This has been a great improvement, and perhaps even more important … because the interest rate on debt has also plunged over the last five years, the percentage … of household income that is used to service the debt has also gone down. So this means that households today are in much better financial shape. And that’s why some economists are very optimistic about household spending and 2013.”