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Fewer Personal Bankruptcies in 2011?

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Experts are predicting fewerconsumer bankruptcies in the new year.

If true, that's pretty good news right?

Maybe—or maybe not.

According to Sara Murray's article in The Wall Street Journal, there are two principal causes:

"The first is that they’re simply carrying less debt. There was $2.40 trillion in outstanding consumer credit as of October, according to the Federal Reserve. That’s down nearly 4.1% from October 2007, before the recession began."

"[The second:] The amount of outstanding revolving credit, or credit-card debt, has also fallen."

So the first point tells us that the American consumer is deleveraging. The second point is that the availability of consumer credit is shrinking.

Is this a trend we should be in a hurry celebrate?

Buying a fourth plasma television when you're already up to your eyeballs in consumer debt is probably a terrible idea.

But access to consumer credit can be a lifeline—especially to owners of small businesses who lack other options for funding in the short term.

It makes sense that accurate data points on this would be both difficult to come by and unreliable once found—because small businesses which use consumer credit to finance operations are, almost by definition, difficult to see on the statistical radar.

Long-term funding of a small business with consumer debt is an expensive and risky option.

Expensive because consumer credit rates are higher than corporate credit—and risky because in the event of corporate bankruptcy those liabilities will remain with the owners of the companies as personal debt.

In my own informal and meandering conversations on the matter, quite a few of the small business owners I know confessed to leaning on their personal credit cards during difficult times.

While consumer credit is certainly a suboptimal way to finance a small business, it typically beats the alternative: Simply locking the doors.

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