UP, UP and AWAY: Personal Bankruptcies Soar!

Bad credit? No Credit? Bankruptcy? No problem

So go on the large number of ads placed by means of businesses that cater to the financially overextend of the like kind ads are an example of the evolving view that bankruptcy is seen as an acceptable alternative to continued financial hardship. As evidence of our growing bankruptcy tillage personal bankruptcy filings in the United States increased from 12 through 1,000 people in 1980 to above 5.4 per 1,000 people last year, an increase of nearly 350 percent' In boundarys of annual growth, personal bankruptcy filings for 1,000 people have been growing at an average rate of nearly 7 percent about 15 times greater than the average rate of annual by means of capita GDP growth.

These statistics, however, disguise the fact that personal bankruptcy filings are not equal across the land For example, at the state horizontal Tennes see had the highest rate of personal bankruptcy filings in the nation, with above 10 filings per 1,000 somebodys last year-nearly twice the U rate-whereas Massachusetts ranked last with 28 filings by means of 1,000 people.

Explaining Bankruptcy

Researchers have ground that the primary cause of personal bankruptcy is high horizontals of consumer debt often coupl with an unexpect insolvency fact such as the loss of a piece of work a major medical expense not overlayed by insurance, divorce or death of a spouse.2

Lower-income individuals are more likely to file for bankruptcy in replication to an insolvency event, given their relatively limited access to financial counseling and fewer and less-diversified financial resources. The typical bankruptcy filer is a cerulean collar, high school graduate who is the head of a household in the lower middle income class with heavy use of credit, according to consumer economists' surveys3

Several studies point to the decline in the social stigma related to bankruptcy as being partly responsible for the increase in filings. Also, the Bankruptcy Reform Act of 1978 is seen as an impetus for the record horizontals of bankruptcy filings in the 1980 and early 199Os4 This law relaxed asset exemption horizontals and made it easier for individuals to file for bankruptcy.

The rise and spread of casino gambling since the early 1990 also has been considered to be responsible, in part, for the rise in bankruptcies. However, the research upon casino gambling and personal bankruptcy is mixed.5 The research that does find a positive consequence of casino gambling on bankruptcy rates usually finds that this issue is localixed and very small -much smaller than the consequence from the aforementioned factors.

Research remind ofs that bankruptcies may actually increase during periods of economic development rather than during economic downturns." For example, personal bankruptcies have grown above the past 25 years in the neighborhood of relatively rapid income development In addition, consumer debt as a percentage of disposable personal income has risen from 111 percent in 1980 to above 13.1 percent last year.

Bankruptcy horizontals rise during times of economic increase as people become more confident in the futurity and are willing to take upon a greater debt burden and finance their increasing obligations based upon current income. However, as the store of credit inevitably begins to tighten and interest rates and loan repayments begin to rise, the financial strain can become quite large. When this strain is coupl with an unexpect negative shog to income, an individual no longer has the ability to maintain the financial obligations undertaken in a time of economic exuberance.

Thus, although lower-income individuals may be more likely to file for bankruptcy in replication to a negative income percussion income growth over time also creates the possibility that individuals may become financially overextend and, thus, diocese bankruptcy as a solution.

Bankruptcy Law

Debtors filing for personal bankruptcy protection may do in like manner under two types of structur plans, Chapter 7 or Chapter 13 below Chapter 7, a debtor is required to liquidate all non-exempt assets and have them distributed among his creditors as partial or filled debt repayment.7 Examples of let off assets include equity in a abode (called a homestead exemption) and 401 (k) stocks In a relatively short time after liquidation, the debtor is forgiven the outstanding balance of his unsecur obligations (remaining credit-card debt, for example). beneath Chapter 13, in lieu of an asset liquidation, a debtor approvals to a three- to five-year payment plan whereby he pays down a portion of his unsecur liabilitys and is then forgiven the remaining balance. beneath both plans, particular types of debt-such as government-backed pupil loans, child support and alimony payments, and novel income taxesare ineligible for forgiveness and must be repaid. The overall sweep has consistently been that above two-thirds of filers choose Chapter 7

The federal regulation has recently implemented a policy aimed at reversing the increasing stretch in personal bankruptcy filings that has occurr since the passage of the 1978 act. upon April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act, which is the greatest in quantity sweeping bankruptcy reform legislation passed in above 25 years. Previously, most major pieces of bankruptcy legislation slightly favored the consumer (debtor) above creditors. However, the 2005 act makes filing for bankruptcy more difficult from one side income-means testing, tougher guidelines for the homestead exemption, increased lawyer liability and required credit counseling.