A recent report from the American Bankruptcy Institute revealed that bankruptcy filings were up 14 percent during the first half of 2010 compared to the same period in 2009. This increase represented a total of 770,117 filings through June of this year.
A number of factors have been attributed to more people filing for bankruptcy, but the biggest has been the financial crisis and Great Recession. To understand more about the increase in bankruptcies, how the recent financial events have affected it and whether it will continue in the future, let’s take a closer look at this this procedure.
Why a Person Initiates a Bankruptcy Filing
There are a number of common-knowledge reasons that people initiate bankruptcy filings, the biggest one being that they feel they can no longer manage debt owed and need a bankruptcy court to either eliminate the responsibility as with a Chapter 7 bankruptcy, or help them create a repayment plan that will get them back on track as with Chapter 13.
However, studies have shown that there are other reasons that a person could initiate a bankruptcy filing. According to a study conducted by Harvard University, the following are the top five reasons that people file for bankruptcy:
- Medical expenses
- Job loss
- Poor/excess of credit
- Divorce/separation
- Unexpected expenses
In addition to these reason, factors like education and socioeconomic status could also play a role, according to a study conducted in 2008 by Jay Zagorsky, a research scientist at Ohio State University’s Center for Human Resource Research.
In his study, he found that those who file for bankruptcy are more likely to be divorced, female, less educated, have lower income, live in urban areas and have bigger families. This is compared to those who have never filed.
Why is Bankruptcy Occurring More Now?
There’s no doubt that many issues have hit homes in the past couple of years. After the Great Recession began, companies quickly let millions of employees go, resulting in what some believe to be over 7 million jobs gone forever. That coupled with a recent drop in credit scores, record foreclosures and other issues that families have faced have resulted in bankruptcy being the only option for many.
As noted by bankruptcy lawyer John T Orcutt’s blog, bankruptcies will likely continue to rise for some time as long as we still suffer the residuals of the recession. The unemployment rate is still high, resting at 9.3 percent and companies are still not hiring. Many individuals who have had to stop paying their bills to put food on the table and have seen their credit suffer as a result are likely to choose bankruptcy as a way to wipe their slate clean.
Is Bankruptcy Really That Bad?
There is undoubtedly a negative stigma attached to a bankruptcy filing. Not only does it ruin your credit, but it also supposedly has a negative effect on your ability to acquire a job or buy a car for many years.
However, according to the study conducted by Zagorsky, bankruptcy filers in many instances don’t have as much bad after bankruptcy luck as many would think. For instance, the study found that 90 percent of bankruptcy filers have a car less than a year after filing, compared to 89 percent of those who never filed. Also, 74 percent of filers have full-time jobs within one and five years, compared with 73 percent of non-filers.
This, of course, doesn’t mean that taking this route is always a good choice. For most, bankruptcy credit (your credit after bankruptcy) plummets and only slightly recovers slowly after many years, making it difficult to take out home loans and make other major purchases without being saddled with extremely high interest rates. What’s worse is that a bankruptcy doesn’t fall off of your credit reports for up to 10 years.
How to Avoid Bankruptcy
If you have a choice to file for bankruptcy or avoid bankruptcy court altogether, it may be better to go ahead and take an alternative route. How could you get this done? Here are a couple of options:
- Manage your money well: The best option for avoiding bankruptcy is managing your money well. Even if you’re in a tough financial situation, it’s important to communicate with your lenders, credit card issuers and others you owe money to so that payment plans could be worked out before they come after you for their money.
- Restructure your debt: Because the Chapter 13 bankruptcy requires that you restructure then repay your debt, you could get help with debt consolidation, credit counseling our other options that help you avoid going near bankruptcy law.
Unfortunately, it looks as though bankruptcies may continue to rise for the next few months or even years as individuals and families work through the difficult financial situations the Great Recession placed them in. But this doesn’t mean you have to add to the numbers. By taking steps to work on your own debt, you could possibly avoid becoming a statistic.