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Fortunately there are many systems in place that provide a bumper before clothing gets so worn out that it might end up in the garbage. Some common practices for the disposal of used clothing are donating it to places such as Salvation Army (where it will be sold very cheaply and the donor receives a tax-break) or consigning the clothing for some return of the purchase price. Because of these options most clothing takes a veryyyy long time to end up in landfills(woohoo!), but not all used clothing is in a state conducive of reuse. After cycles of use and reuse, fabrics wear out, and at this point many people would throw the clothes in the garbage, BUT the fabric can be recycled!
Patagonia is a great example of fabric recycling on an industrial level. Most of their polyester clothing is in fact made from recycled water bottles! How cool is that? This video explains it all: http://www.patagonia.com/us/footprint/index.jsp?id=25146
Also, this jacket from Patagonia that I got with the crew team is made from 60% recycled materials! http://www.patagonia.com/us/footprint/index.jsp?id=25146 That's better than most products in the garment industry, but the company says they still have a ways to go. Not only do they recycle polyester, but according to this website
http://ehp03.niehs.nih.gov/article/info%3Adoi%2F10.1289%2Fehp.115-a449 much of their cotton is from recycled material as well. "Patagonia also recycles its cotton T-shirts through Italian company Calamai Functional Fabrics. According to Trailspace.com, an outdoor gear information site, recycling cotton saves 20,000 liters of water per kilogram of cotton, a water-intensive crop." Unfortunately the pricetag on the clothing reflects the expensive process used to make it, so even though recycling clothing is a technologically feasible action, the current economic state of it prevent it from being more widespread than it is.
There is a company that focuses on clothing recycling in New York City, and it runs by donation mostly called Wearable Collections http://www.wearablecollections.com/index.php. It is an absolute necessity to our consumer culture, if only it were present on a broader scale (the company operates in New York City, central New Jersey, and Long Island). From their company reusable clothing goes to second-hand stores, rags become wiping and polishing cloths, and the remaining fibers get broken down to go in mattresses and couches. It is a for-profit company, but they provide the service of collecting used clothing for free, and raise a significant amount of funds for charity as well.
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