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Some surprising data about life during bankruptcy

Nearly one in eight in U.S. have at least considered bankruptcy


Ages 35 to 54 'more likely' than other age groups

According to a May 19 press release from FindLaw.com, "Nearly one in eight Americans – 13 percent – have either filed or considered filing for bankruptcy, according to a new survey by FindLaw.com (www.findlaw.com)," and that the "survey found that people between the ages of 35 and 54 are 50 percent more likely to have considered filing for bankruptcy than people ages 18-34 or 55 and older. People of retirement age (65 and older) are the least likely to have considered filing for bankruptcy (7 percent).

"More than 1.5 million Americans filed for personal bankruptcy last year, according to the National Bankruptcy Research Center. That's the highest level since 2005, which saw a wave of bankruptcy filings just ahead of" the credit-card industry's push for changes to the bankruptcy code, the so-called reform act known as BAPCPA.

"Personal bankruptcies are often the result of a major life event, such as loss of a job, a medical emergency, home foreclosure and so on. Bankruptcy laws dictate who is eligible to file for personal bankruptcy, which debts can be wiped out, which debts will remain, and what happens to personal property, including homes."

Top reasons most often cited

The most often cited "top five" reasons for filing for bankruptcy protection are usually:

  1. medical bills, including medical emergency

  2. job loss

  3. uncontrolled spending

  4. divorce

  5. catastrophe, including natural disasters.

Why versus when

However, says an informative blog at CreditSlips.com, "The macrodata will fail to explain any individual case. A foreclosure, a job loss, a medical problem, and many other problems will be the primary impetus for why many consumers will find themselves in bankruptcy court. These reasons explain why someone ends up filing bankruptcy, but they do not provide much help in explaining when they end up in bankruptcy court. Looking at trends in bankruptcy filing rates is all about the "when" question, and here macrodata are very helpful. The ups and downs of consumer debt levels tell us much--not everything, but much--about these trends."

Simply put: 'No debt, no bankruptcy'

In other words, bad things do happen to good people. But the bottom line always involves debt, whether an indulgence of budget-impaired consumers with poor judgment or the result of pernicious business models of a predatory finance industry. The blog continues:

People file bankruptcy to discharge debt (at least in the United States). No debt, no bankruptcy. In the long run, the overall bankruptcy filing rate will rise and fall with the amount of consumer debt. As people accumulate more debt, bankruptcy demand will grow. That is why we see countries often adopting American-style consumer bankruptcy laws featuring debt forgiveness as consumer debt in that country increases. Without lots of consumer debt, talking about bankruptcy filings rates is like talking about snow accumulations in Honolulu.

The long-term growth in U.S. consumer bankruptcies closely tracks the long-term growth in U.S. consumer debt. When the financial crisis hit, consumer credit dried up, and outstanding consumer debt experienced unprecedented declines. There are fewer reasons to file bankruptcy today because there was less borrowing two to three years ago.

Consumer debt also has a profound but perhaps counter-intuitive short-term effect on consumer bankruptcy rates. In the short-run, a decline in consumer credit will lead to a bump in consumer bankruptcy filings. As people run out of options--as they become less able to put this month's grocery or utility bills on a credit card--bankruptcy becomes a more attractive option. People can and will continue to borrow to stave off the day of reckoning. If a lender is willing to extend credit, further borrowing is a rational decision. After all, the consumer can become "none more broke" by borrowing further but might see things turn around tomorrow if they can get by just one more day on a credit card. Students of option pricing should quickly grasp the point.

Auto loans and bankruptcy

In fact, contrary to public perception, it's even possible to secure an auto loan despite having filed for bankruptcy protection. The following is from a sub-prime auto lender:
Since a Chapter 13 bankruptcy can last for a number of years, while a Chapter 7 usually lasts for a little more than four months, bad credit car lenders look at each type differently.

A Chapter 7

In a Chapter 7 bankruptcy, the first step to filing is the means test. If this test is passed, the next step is the 341 meeting of creditors. This is where the court affirms the value of your assets and the accuracy of the information contained in the schedule of debts.

The 341 meeting is important, because bad credit lenders will not even consider an application until this meeting has been held. While most lenders want a Chapter 7 to be discharged (due to the short length of time), there are also some who will look at an application provided the 341 meeting has taken place.

A Chapter 13

A Chapter 13 bankruptcy is entirely different. In order to apply for a car loan if you’re in a Chapter 13, you need to ask the trustee to petition the court for an order to incur additional debt. Without this order, you are not permitted to apply for any loans.

Since a bankruptcy appears on your credit report, any lender will be aware that you’re in a bankruptcy. Before even considering your application, they’ll request a copy of the order to incur additional debt. It not only gives permission, it also specifies the maximum amount the court will allow you to borrow and might also state the maximum interest you’ll be allowed to pay (a sticking point with many bad credit lenders).

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