Fewer people filed bankruptcy in the year ending in September 2017 than in any other year since 2007, but many observers think there may be bad financial news on the horizon.
Low interest rates may be the main reason that bankruptcy filings for fiscal 2016 decreased 1.8 percent. With these low rates, many distressed debtors have been able to borrow their way back to solvency and hang tight until the financial storm passed. But if, as expected, interest rates increase dramatically, such a strategy will no longer be possible. Furthermore, the 1.8 percent change is the lowest decline since filing rates began dropping in 2011. Northwestern bankruptcy law Professor Bruce Markell said that the levelling-off and higher interest rates “will result in many more filings—both consumer and business.”
The number of Chapter 12 filings, although still very small, increased significantly, as a near-record number of family farmers took advantage of this loophole bankruptcy.
Issues due to unavoidable and unforeseen business downturns, although poor management decisions sometimes exacerbate these problems, are responsible for most business bankruptcies. Similarly, most people file personal bankruptcies due to circumstances that are beyond their control, such as:
- – Medical Bills: Hopes that subsidized health insurance would end “medical bankruptcies” have largely been dashed. In fact, a third of insured Americans said they took money out of college or retirement savings account to satisfy medical expenses at least once in the past twelve months.
- – Divorce: The sudden loss of income combined with a sudden spike in expenses, because of legal fees and other divorce-related costs, drives many people into bankruptcy. The situation is even more acute for divorced women, because they rebuild wealth much more slowly than divorced men.
- – Job Loss: Most people have little or no savings, so even a month or two without income causes massive economic hardship.
These financial storms show no mercy. Sometimes, two or more occur at once. Furthermore, when it comes to financial distress, lightning does sometimes strike twice in the same place.
Some people feel ashamed because they file bankruptcy, but because the causes are uncontrollable, there is no reason to be embarrassed. The only reason to feel otherwise is if people let their pride get in the way of a necessary bankruptcy, and their loved ones suffer because of their delay.
The Bankruptcy Abuse Prevention and Consumer Protection Act’s sponsor, Iowa Senator Chuck Grassley, specifically excluded Chapter 12 bankruptcies from the law’s provisions. Essentially, this 2005 measure was designed to make bankruptcy more difficult to file, through provisions such as:
- – Credit Counselling: Before filing and before discharge, debtors must attend either a debt counselling class or a budgeting class.
- – Means Test: To be eligible for Chapter 7, the debtor’s income must be below the average income for that geographic area.
These hurdles are usually not difficult to overcome. Furthermore, BAPCPA made almost no substantive changes to the Bankruptcy Code, so for the most part, the same rules as before apply to asset protection and debt discharge.
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