The bankruptcy blog

The day your Chapter 7 bankruptcy is discharged is a wonderful day. The process is over. Most or all of your qualifying unsecured debts have literally been wiped away. You’ve got a clean slate and can now make the fresh start bankruptcy laws were intended to provide. So now what? What specific things can you do to rebuild and restore your credit so you can begin to build up some real financial strength moving forward? This article will outline a number of Chapter 7 bankruptcy recovery steps you can take. But make sure you have realistic expectations. Recovering from bankruptcy will take at least several years. You have to be patient and keep working on it to make progress, but you can do it.

Step 1: Budgeting, Spending Less than You Earn, and Saving

While many people resort to filing Chapter 7 bankruptcy from the unexpected loss of a job or a medical emergency and its huge bills, there are just as many people who got into trouble by routinely overspending and not managing their finances well. For the latter group of bankruptcy filers, now is the time to do better, establish better habits, and keep a closer eye on your financial health moving forward. This is probably the most important of all the bankruptcy recovery steps you take. The big picture aspects of this step are spending less than you earn, making a realistic budget and sticking to it, and beginning to save money ahead of the next unexpected happening in life so you’ll have a cushion to fall back on when needed.

You can get help with this from a certified, reputable credit counseling service. Note that this kind of service is not the same as for-profit operations such as credit repair companies or debt settlement companies. In order to understand the differences and to find a good credit counselor, check out this article from The Balance. You can also visit the Financial Counseling Association of America or the National Foundation for Credit Counseling. And be very careful before spending any money on a credit repair service that makes it sound like they can easily “fix” your credit problems. Learn more in our previous article, Do Credit Repair Services Work?

Step 2: Obtain and Responsibly Use a Line of Credit

Recovering after bankruptcy doesn’t seem like it should include taking on new debt, but it often does. Your credit score going into bankruptcy may have already been very low. Filing for bankruptcy might have caused it to go even lower. When your Chapter 7 bankruptcy is discharged, your credit score won’t immediately jump upwards. Why not? You’d think it would since you will probably have the best debt-to-income ratio you’ve had in while with all that debt wiped away. But while that ratio is important when lenders are considering you for a loan, it’s not very important to your credit score. What plays a much larger role in shaping your credit score is your track record of responsibly using your available credit. That’s what you need to establish moving forward to see your credit score begin to rise.

If your primary type of debts were credit card debts, you might decide to give up on credit cards in favor of paying cash for everything. But that’s not going to help improve your credit score or build a track record of responsibly using credit. Cash transactions aren’t reported to credit bureaus! What gets reported to credit bureaus are when you make on-time monthly payments on a line of credit. And yet here you are with a bankruptcy red flag on your credit report, which means getting that line of credit might be difficult. Here are three ways to accomplish this step:

Secured Credit Card: You give the card issuing bank an agreed upon amount of money, say $200 or $500, and a portion of that amount becomes the credit limit of the card. You can charge things and make your on-time monthly payments to build your credit, and if you were to ever miss a payment, the bank already has the money you gave them to cover the entire credit limit of the card if needed. But remember, the best way to build credit is making on-time payments every month. It’s also a good idea to plan on paying the balance off entirely each month. Carrying a balance from month-to-month isn’t a huge problem as long as you’re making at least the minimum payment on-time since the overall amount of credit involved is very small. But it’s still better to pay it off in full every month, especially because the interest rate is going to be pretty high on this type of card.

Bankruptcy Car Loan: Another option for building credit would be to apply for a loan, such as to purchase a used car. Many lenders will see your Chapter 7 bankruptcy as a big red flag and will reject your application. But there are other lenders who do work with bankruptcy customers. They understand your situation and are willing to take on the risk of making you a loan, although you’ll end up with a higher interest rate. Day One Credit specializes in helping customers with an open or discharged bankruptcy find a bankruptcy car loan to finance the purchase of a used car. Again, once you obtain a new post-bankruptcy line of credit, the key is to use it responsibly by making on-time payments each and every month.

Credit-Builder Loan: This is a special kind of loan not offered at most big banks but can often be obtained at a credit union or community bank. The lender agrees to loan you an amount of money (usually less than $1,000) but doesn’t give you the money. Instead, it puts the money into a savings account it controls. This is an installment loan, and as long as you make the monthly payments on-time, you’ll get all that money back at the end of the loan, and all those payments made along the way will be reported to the credit bureaus, helping build up your credit score and history. As with everything else suggested in this article, for this to have a positive impact on your credit you have to make your monthly payments on-time every time. Late payments hurt your credit score. A credit-builder loan is not only a great way to build your credit, but it also helps you save money as well over the course of the loan. You can learn more about this kind of loan from Credit Karma in Credit-builder loans: What they are and how they work.

Step 3: Monitor Your Credit Score and Fix Your Credit Report

This third of our bankruptcy recovery steps is one that many people miss. You’ll want to keep a closer eye on your credit score than you probably ever did before filing bankruptcy. You have to be able to see this score and how it changes in order to know what you’re doing is making a difference. This means looking at your credit report and score more frequently than the free annual check to which everyone is entitled. You should be looking at your score and report on a monthly basis. One way to do this is by signing up for a free credit monitoring service. One of the “big 3” credit bureaus, Experian offers free monthly access to your credit score and report, as does Credit Karma for the other two credit bureaus (Equifax and TransUnion). This monitoring will help you stay on top of what’s happening with your credit score, but it’s up to you to identify and fix errors on your credit report.

Recover from Chapter 7 Bankruptcy with Help from Day One Credit

Recovering after bankruptcy can feel like a daunting task, but with a little patience and smart decisions, you can do it. If you’ve recently had your Chapter 7 bankruptcy discharged and need to buy a used car, you might be nervous about whether or not any lender will work with you when they see that big red flag of a bankruptcy on your credit report. Many lenders may reject you because of your bankruptcy, but not all lenders! Day One has established strong working relationships with a network of reputable lenders who are willing to consider lending to those with a recently discharged bankruptcy. If you meet our guidelines and are approved, then you’ve got a great way to start rebuilding your credit by making on-time monthly payments on the bankruptcy car loan we find for you, not to mention the car you need! Got questions about how this works? Check out our Common Questions page, or contact us and we’ll be happy to talk you through your options!

What are your options when your debts are on the rise relative to your income and you feel like you’ll never be able to pay them back or need a new plan to get caught up? Filing for a Chapter 7 or Chapter 13 bankruptcy might be your best bet. But it might not be. In fact, there are a number of situations when bankruptcy is not a good idea. We’ll outline those in this article so you have a better understanding of what you can do about your debts.

Get Advice from a Qualified Bankruptcy Attorney

The first thing we always want to make clear is that while we understand a lot about bankruptcy because of what we do to help customers get bankruptcy car loans, we are not bankruptcy lawyers. The first place to start when you’re wondering if you should file bankruptcy is by seeking the advice of a qualified, reputable bankruptcy attorney. In the San Diego area, we’re happy to recommend several on our attorneys page. And if you want additional guidance, check out our previous article, Choosing a Bankruptcy Lawyer. A qualified bankruptcy attorney can help you understand whether or not filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy is the best choice for your specific situation.

Situations Where Bankruptcy is Not a Good Idea

There are a number of situations where bankruptcy isn’t necessarily the best option. In a moment of panic or desperation, you might assume filing bankruptcy is your only option, but first pause, take a deep breath, and consider the following examples of when bankruptcy is not a good idea:

Your Income Substantially Exceeds Your Expenses

The tipping point in favor of filing for bankruptcy is when your necessary monthly expenses (including minimum debt payments) total to more than your monthly net income. This may seem obvious, but it’s not always clear to some people who have mountains of debt but could pay it off if they just stuck to a plan. When it looks like a long road to pay those debts down, some would rather just walk away from the debt. But if you have substantial income left over after paying all necessary expenses, then you don’t need to file for bankruptcy, you just need to buckle down and get pay it off over time. Keep in mind it’s not about amount of debt you have, it’s about your debt relative to your income. $10,000 of debt may seem like very little, but it’s a lot if you have no income and no prospects for getting a job or increasing your income. Another option is to enlist the help of a credit counseling or debt management program—just be sure to do your homework and make sure it’s legitimate and has good reviews from independent sources.

You Have Assets You Want to Protect

In most cases, you can protect certain essential assets from the bankruptcy process, typically including the car you need to drive, the house you need to live in, retirement accounts, household items, and so on (there are very specific laws in each state that govern which assets are protected and which are not). But keep in mind that a Chapter 7 bankruptcy is also called a “liquidation” bankruptcy. The reason for this is because the bankruptcy trustee is going to be looking to see if you have assets that could be sold off to pay off at least some portion of what you owe to creditors. For example, you may own land that has been in your family for generations, but if you don’t live on that land, it’s probably not going to be protected and could be sold off by your bankruptcy trustee to pay creditors. If you don’t have any substantial assets, a Chapter 7 filing might be the way to go, especially if the bulk of your debts are unsecured, such as credit card debt. Again, we strongly recommend you spend time talking to a qualified, reputable bankruptcy attorney with your questions about assets you might run the risk of losing in a bankruptcy case.

You Recently Became Entitled to an Inheritance

This one involves some really tricky timing, so pay close attention. Let’s say you’re under financial stress from too much debt and are considering or preparing to file for bankruptcy. Then let’s say someone dies who leaves you money or other assets in their will or a trust. It’s going to take some time for all that to be processed. This is definitely a situation when bankruptcy is not a good idea! If you file for bankruptcy and then you receive the inheritance, the bankruptcy trustee can take it away from you. In fact, even when you file bankruptcy, if you become eligible for an inheritance with 180 days of filing, that money or those assets can be seized to pay your creditors, but then you’re still stuck with a bankruptcy on your credit history.

Your Debts Are Business Related, Not Personal

Note that if your business is a sole proprietorship, then there’s no difference between business debt and personal debt—they’re considered one and the same. However, if your business has been properly set up as a corporation or limited liability company and none of the business debt has been personally guaranteed by you, the creditors will have to be satisfied with the assets of the business and cannot go after you personally. This opens up the possibility that bankruptcy is not a good idea in this specific situation. Be sure to go over the details of your business and its debts with your bankruptcy attorney before deciding on a course of action!

The Types of Debt You Have Don’t Quality for Bankruptcy

This comes as a surprise to many people who don’t know much if anything about bankruptcy, but not all debts qualify to be included in your bankruptcy case. Read the list below carefully as there are exceptions to some of them. Here are a number of types of debt that typically cannot be included in a bankruptcy filing:

Child Support: If you’ve fallen behind on court-ordered or court-approved child support payments, those are debts you have to make good on. Child support debt cannot be included in a bankruptcy filing.

Alimony: Similar to child support, if you’ve fallen behind on court-ordered or court-approved alimony payments to an ex-spouse, that debt also cannot be included in your bankruptcy case.

Taxes: Most taxes cannot be included in your bankruptcy, especially state and federal income taxes. There are exceptions to this, though rare, so be sure to go over the details of any tax debts you owe with your bankruptcy attorney. Any tax debts from recent years will definitely not be included in a bankruptcy, but it may be possible to include some that are older than three years.

Student Loans: Many people have become burdened by huge amounts of student loan debt in recent years, but those are almost never allowed to be included in a bankruptcy filing. Again, there are rare exceptions, but it involves proving extreme hardship, and the bar has been set very high on exceptions. There are many organizations out there, however, that can help those burdened with loads of student loan debt.

As you can see, the decision to file bankruptcy requires considering the details of your specific situation and making sure it’s the right course of action for you to take because there are all those situations where bankruptcy is not a good idea. This is why it’s so important to find and speak with a reputable bankruptcy attorney who knows how it works and can advise you based on your unique circumstances.

Day One Credit: The Keys to Your Fresh Start

It’s also surprisingly common for people who file for bankruptcy to suddenly find themselves need to replace their car, which can be an added sources of stress they don’t need at a difficult time. Many people just assume that having an open or recently discharged bankruptcy means there is no way they can get financing to make a vehicle purchase. Not true! There are lenders out there who have car loan programs specifically designed to serve bankruptcy customers. Day One Credit has a assembled a whole network of those lenders so we can help you by finding a bankruptcy car loan to fit your situation. Explore how it works on our Why Day One page, get answers to your questions on our Common Questions page, or feel free to call us directly at 855-475-4725 and we’ll be happy to help!

The novel coronavirus and COVID-19 pandemic has caused a serious economic downturn—and one that may well turn out to be significantly worse than the Great Recession of 2007-2009 that hit with the bursting of the housing bubble and the subsequent collapse of many financial institutions. Given the spike in bankruptcy filings that occurred as result of the last major recession, the current pandemic-induced recession will undoubtedly result in a tsunami of bankruptcy filings. If you’re watching your financial situation deteriorate and think filing for bankruptcy may be necessary, this article provides guidance on how to plan for bankruptcy.

How the Current Recession is Unique and Devastating

Back in June a World Bank report spelled out how this recession is different from all others. It’s the first global recession every caused solely by a pandemic. The overall global economy is expected to shrink by 5.2% in 2020, which is the worst decline since WWII’s devastating impact on the global economy. It also hit faster and harder than any previous recession. For all intents and purposes, national economies literally shut down overnight in a wave that went all around the world. And in spite of everyone’s best efforts, there’s no end in sight until safe, effective vaccines or treatments become widely available.

For the US, the National Association for Business Economics sees a very slow recovery. Economists are saying that GDP (gross domestic product) won’t get back to its pre-COVID level until at least 2022 or even 2023, and same goes for job growth reaching pre-pandemic levels. In fact, many believe that as many as 40% of pandemic business closures will become permanent. According to the Bureau of Labor Statistics, unemployment spiked up to 14.7% in April, and although it’s been falling since then down to 8.4% in July, there’s still a long way to go to get back to the 3.5% unemployment rate we had in February before the pandemic hit, and economists are saying it’s going to take years to fully recover.

Millions of people are hanging on by a thread and are only a matter of weeks away from resigning themselves to filing for bankruptcy. If you fall in this category, there are things you can do to plan for bankruptcy before you file, which we’ll outline below.

What You Can do to Plan for Bankruptcy

First and foremost, the best thing you can do to plan for bankruptcy is start looking around for a reputable bankruptcy attorney who can help you determine if bankruptcy is the right option for you, what type of bankruptcy you should file (Chapter 7 or Chapter 13 in most cases), and what you’ll need to do file. See our previous article on Choosing a Bankruptcy Lawyer and be sure to check out our page of bankruptcy attorneys we trust in the greater San Diego area.

It’s also helpful to know some of the main differences between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy in order to decide which one is right for you, although again your bankruptcy attorney will help you figure out which option is better for you. A Chapter 7 bankruptcy (also called a “liquidation” or “straight” bankruptcy) is where any significant non-exempt assets are sold off to pay back some portion of your qualifying debts, and what remains is entirely wiped away when the bankruptcy is discharged. A Chapter 13 bankruptcy is the kind where your debts are reorganized and/or reduced so you can get caught up over the course of a 3-5 year court-approved repayment plan. Because many of the bankruptcies that will be filed as a result of the pandemic-induced recession involve reduced income because of losing a job, the Chapter 7 option will likely be the most common type of bankruptcy filed. But again, follow the advice of a qualified, reputable bankruptcy attorney to help you choose which type of filing is right for your specific situation.

Start Gathering a Mountain of Documentation

When you decide to file for bankruptcy and choose a good attorney to help you, they’re going to need an extensive amount of information from you in order to determine which type of bankruptcy you should file. You can get a jump-start when you plan for bankruptcy by starting on the following list of items that will probably be asked of you in the bankruptcy attorney’s intake process:

Mortgage Information: You’ll need to provide details about each mortgage and home equity line or loan you hold and the relevant properties.

Bank Accounts: For each and every bank account you’ll need to provide specific information about the bank, the type of account (checking, savings, Christmas club, passbook), the account number and balance for each account.

Vehicles (to include cars, trucks, motorcycles and boats, etc.): You will need to describe all your vehicles, along with details on any financing you have on them.

Other Assets: You’ll have to make a list of any and all life insurance policies (term or whole life), along with cash value if any, as well as all Pensions, annuities, 401K plans, 403 B plans, and so on, with complete address and account numbers for each.

Taxes Owed: List all taxes owed to government, including the IRS, state, city or town

Court-Ordered Obligations: Collect all the details related to any child support, alimony, amounts and arrearages, and court ordered property settlements from a divorce, and any wages owed to employee(s) if applicable (name, address, account number of each person owed any such debt, type of debt and balance owed, when the debt was incurred, etc.).

Any and all bills and money owed to anyone: Omit nothing as all debts must be listed and identified, whether or not they end up being included as part of the bankruptcy.

Income Information: Your gross weekly, bi-weekly, or monthly income, a list of all deductions (taxes, insurances, 401k, union dues, etc.) withheld and purpose of said deductions broken down by pay period. Name and address of employer, position, and tenure of employment. If you are self-employed and file a schedule C on your federal income tax return, or if you receive a 1099 tax form as an independent contractor, you’ll need to provide a Profit and Loss Statement (income vs. expenses) by month for past twelve months, or equivalent documentation, as well as a copy of your schedule C and all 1099s received.

Monthly Expenditures: This is your detailed monthly budget including everything you spend money on such as rent/mortgage, insurance (home, vehicles, etc.), heating fuel, phone, cable, internet, food, dry cleaning, electricity, car insurance, uninsured medical expenses, clothing, recreation, charitable giving, transportation expenses (gas, vehicle maintenance, repairs, registration, etc.), and all monthly debt payments. It’s important to include ALL expenses!

And that’s just a sampling of the kinds of information you’ll need to have on hand and provide to your bankruptcy attorney so he or she can see which type of bankruptcy is right for you and then prepare your filing for submission to the bankruptcy court.

When Should You File Bankruptcy, and Can You Do it Yourself?

A surprising number of people try to scrape by as best they can, sometimes for years, with seriously challenged credit before finally deciding to file for bankruptcy. Maybe it’s the stigma attached to filing bankruptcy that makes people turn to it only as a last resort when things get really desperate. Those months and years of stress can take a serious toll. The thing to keep in mind is that bankruptcy laws are intended to provide relief and give you a fresh start when your debts become unmanageable, often due to circumstances entirely beyond your control.

No one knew a global pandemic was coming, nor did most people foresee the severe economic consequences it would have on so many people who have lost their jobs. The direct relief payments from the federal government helped a little but now feel like a drop in the bucket. The extended unemployment benefits both in duration and amount certainly helped, but all that assistance has long expired, and it seems doubtful as to when or even if more aid will be forthcoming from Congress. If you’ve lost your job, have little to no savings, and no prospects to recover gainful employment in the near future, there is really no reason to wait, and no one in in their right mind would criticize you if you decide to file for bankruptcy. In fact, it might be the smartest decision you make in these uncertain times.

Then there’s also the question of whether you can or should try to handle filing your own bankruptcy. Yes, you are allowed to file bankruptcy on your own, without the assistance of a bankruptcy attorney. But it’s also clear that you may be better off with the help of an attorney. As the US courts website states:

Filing personal bankruptcy under Chapter 7 or Chapter 13 takes careful preparation and understanding of legal issues. Misunderstandings of the law or making mistakes in the process can affect your rights.

In other words, unless you have a thorough understanding of both federal and state bankruptcy laws, including the rules of the local court where you would file, you should seek the assistance of a qualified, reputable bankruptcy attorney.

When You Need to Buy a Car During Bankruptcy

Something that happens far more often than you might think is this: You file for bankruptcy and soon after filing you discover you need to replace your car. What to do? You know your credit is bottoming out or you wouldn’t be filing for bankruptcy in the first place. The first thing you need to do is get on the phone with your bankruptcy attorney. Explain your situation and they will let you know if it’s a good idea for you to seek financing at that point in your bankruptcy process.

You might think it would be impossible for you to get any kind of car loan, but there are lenders who do have specific programs for people who need to finance a used car purchase while their bankruptcy is still open or after it has been discharged. At Day One Credit, we’ve spent years developing an extensive network of relationships with lenders who will work with bankruptcy customers. And you don’t have to wait to apply for financing through us. As soon as you have a Chapter 7 case number or a Chapter 13 approved payment plan and the written permission of your bankruptcy trustee, we can help you find the bankruptcy car loan that fits your situation. You can get started right away on seeking a bankruptcy car loan, find out more information on our Common Questions page, or give us a call at 855-475-4725 to find out more about your options!

When the novel coronavirus outbreak and COVID-19 pandemic reached the US, it took a while before states were willing to put stay-home orders in place and force the closure of non-essential businesses, not to mention schools. But when the country did go into shut-down, it happened in what felt like the blink of an eye. From mid-March through the first week of June, more than 49 million people filed for unemployment benefits. The official unemployment rate in April was measured at 14.7% (source), which is significantly higher than the peak rate of 10% (source) that occurred during the Great Recession that hit in 2008. What does all this mean for bankruptcy filings and car loans? This article will explain the likely impacts and what you can do if you find yourself on the verge of bankruptcy in the coming months.

Bankruptcy Filings are a Lagging Economic Indicator

At first glance, you might be surprised to learn that bankruptcy filings have gone down in the first couple months of the pandemic. During the month of March 2020, there were a grand total of 62,861 individual bankruptcy filings (source)—this was the lowest number of filings in the month of March for a full decade (! But then there were even fewer filings in April, which registered only 38,425 of new consumer bankruptcy filings, representing a nearly 39% decrease from the March figure, which was already low (source)! What gives? The answer, of course, is that bankruptcy filings are what economists call a “lagging indicator.” In other words, the impact of an economic downturn isn’t immediately seen in bankruptcy filings. For example, in the year the Great Recession hit in 2007-2008, bankruptcy filings did go up in 2008, and then increased greatly for the following two years (2009 and 2010). It wasn’t until 2011 that the rate of filing began falling. Based on this lagging nature of bankruptcy filings, we can safely assuming we haven’t even begun to see the impact yet. It’s just too early.

The Pandemic Recession is Different from Previous Recessions

But the nature of the COVID-19 pandemic complicates this lag-time even further. It’s possible that there would have been a surge in filings in April, but many of the bankruptcy courts were closed much like everything else. Some did allow filings to proceed in an electronic fashion, but it still resulted in a greatly reduced capacity to accept filings, not to mention all the people who really can’t handle an approach that relies on technology.

Besides the reduced capacity of the courts to take on and process cases, there’s also another factor. Everyone notes how unprecedented this whole situation has been in terms of rapid shut-down of the economy and immediate huge waves of job losses. But it has also been unprecedented in terms of how quickly and comprehensively the federal government acted to help people. In addition to sending relief checks directly to many individuals, unemployment benefits were expanded both in the amount people receive and for how long they can receive it. Quite a few people are making more on unemployment right now than did when they were working. Because most people consider bankruptcy to be the absolute last resort, the financial assistance provided by the government may in fact be further delaying the inevitable wave of bankruptcy filings that is sure to come. It might just take a little longer for it to peak than it has in past recessions.

Is a Tsunami of Bankruptcy Filings Coming?

We certainly hope there isn’t a tsunami of bankruptcy filings. Maybe the federal government will distribute more relief funds to individuals. Maybe it will also further extend unemployment benefits to help those who are struggling. Maybe it will also provide additional help to businesses in order to get more people back to work. But those are a lot of maybes.

One of the strongest correlations is between job loss and bankruptcy filings. Unemployment in the Great Recession peaked at 10% (source), and we’re already well beyond that during the pandemic. April unemployment was 14.7% (source). May unemployment, oddly enough, actually fell to 13.3% when everyone expected it to rise even further (source). There are good reasons to question the accuracy of these numbers (see this CNN article if you want to get into it), but suffice it to say that some experts are saying the unemployment figure for April was probably more like 19.2% and May was something more along the lines of 16.1% (source). Either way you look at it, the unemployment situation is the worst it’s been since the Great Depression! As one reporter put it, “The speed and magnitude of the loss defies comparison. It is roughly double what the nation experienced during the entire financial crisis from 2007 to 2009” (source). In this sense, many think it’s not a matter of if bankruptcy filings are going to go up but when they will go up. Still, we can hope it won’t be a tsunami.

The lag-time in bankruptcy filings is going to be longer than previous recessions for reasons stated earlier (government assistance and bankruptcy court closures), but there’s another one to add into the mix. Another strong correlation to bankruptcy filings is overall household debt-to-income ratio. You might recall that the Great Recession was also referred to as a “financial crisis.” Too many people were playing fast and loose with credit to consumers who should have never been approved in the first place (especially in the mortgage industry). Just before the crisis, the overall household debt-to-income ratio was at an all-time high of 1.24 whereas just before the pandemic it was only 0.95 (source). This means many households were generally in a healthier financial situation going into the current downturn. In other words, this is another factor that might contribute to a longer lag-time in seeing bankruptcy filings increase.

What to Do If You Need to Buy a Car in Bankruptcy

It will take months, and maybe even years, before we know to what extent personal bankruptcy filings may increase. If they do rise, a lot of them will be people who have never filed bankruptcy before, among other firsts that people are experiencing thanks to the pandemic (such as filing to receive unemployment benefits). If they’re like most people, they will wait as long as possible. They will struggle for weeks and even months until they finally reach the breaking point and decide they should file. This whole process will leave them feeling frustrated and overwhelmed.

Now imagine all the people who will go ahead and file for bankruptcy at some point in the coming months, only to then discover they need to replace their car. This will add even more stress and anxiety to an already difficult situation. Many will go to one or more dealers or lenders only to discover they aren’t willing to work with them because of their bankruptcy. Now they’ll be feeling downright desperate.

But this doesn’t have to be how any of this goes! At Day One Credit, we’ve established strong relationships with lenders who are willing to work with bankruptcy customers because we and they understand how bankruptcy is meant to be a fresh start to a better financial future. If you find yourself looking for the keys a fresh start in the coming months, please know that Day One Credit is here to explain all your options and guide you through the process of finding a bankruptcy car loan for your specific situation. You can get answers to common questions and apply online now!

It’s true that the longest post-recession economic recovery is still underway in the history of the US. But there are signs that the economy is beginning to slow, and when that happens there will no doubt be an uptick in the number of people who file for bankruptcy. Understanding how bankruptcy statistics have changed and what those statistics mean helps put bankruptcy in perspective for anyone who has or might soon find themselves needing to file.

Bankruptcies Rise for the First Time in Nearly a Decade

The number of bankruptcy filings have fallen every year since the Great Recession peak in 2010. According to the latest data from the US Federal Courts, bankruptcy filings for the 12-month period ending September 30, 2019 increased 0.4% to 776,674 compared to 773,375 at the same point in 2018. But to get a better sense of what’s been happening in the big picture of bankruptcy filings, you have to step back and look at bankruptcy statistics over time.

Big Changes in Bankruptcy Statistics Over Time

The most obvious statistic to look is the total number of bankruptcy filings each year, as assembled from data collected by the US Federal Courts. Here’s one to get us started:

The above chart is a good one to show how a sharp economic downturn can drive up bankruptcy filings. The Great Recession hit in in 2008, so bankruptcies went up sharply that year and the two following years (2009 and 2010). Then the economic recovery got underway, and has continued to be the strongest, longest in US history. But you can also see that the rate of decrease in bankruptcy filings has slowed and leveled off.

Does this mean we’re on the edge of a new recession? Another downturn is inevitable at some point, and the Federal Reserve has been desperately reducing interest rates in an effort to hold it off (three decreases this year alone after it had raised interest rates four times last year). This relationship between bankruptcy filings and the general economy is best illustrated by taking a look at how unemployment rates changed over roughly the same period of time (2007-2018):

And the unemployment rate has fallen even further since this graph, all the way down to 3.5% in September. Although it’s a line graph instead of a bar graph, you can see how closely the general “shape” of the curve in both charts is basically the same. Clearly, losing a job is a main driver that causes many people to seek relief from bankruptcy laws. But it’s also helpful to take a broader look at these bankruptcy statistics over time, such as the chart below showing business and personal bankruptcy filings since 1987:

The above graph raises the question of what in the world happened in 2005 to cause such as huge spike in bankruptcy filings. As it turns out, 2005 is the year when major changes were made to US bankruptcy laws. The changes were pushed hard by the credit industry and were all geared towards making it harder and more expensive for people to file bankruptcy.

The spike in 2005 can largely be attributed, in our opinion,  to people and businesses who decided to go ahead and file before the changes took effect. This is very revealing because it indicates many people are teetering on the edge of bankruptcy at any given moment. One small thing could push them over the edge such as an unexpected medical expense or home repair not covered by insurance or, in this case, knowing that the laws were about to change. In other words, there are literally millions of people and businesses who could file bankruptcy at any time but don’t for a variety of reasons, such as the stigma associated with it. After all, no one wants to admit financial failure, even when it’s not because of anything they did wrong. The rise in bankruptcy filings over the several years prior to 2005 can probably be attributed to the Dot-Com Crash.

What happens if we back up even further, though, by really zooming out to get the biggest picture possible? If you look at bankruptcy filing data from 1900,  it clear that declaring bankruptcy has been on the steady rise pretty much from the beginning, and have skyrocketed dramatically since 1980. The biggest driver of this trend could be described, in our opinion,  as “easy credit from greedy creditors.” The revolving lines of credit available to consumers through credit cards didn’t really hit the scene until the last 40 years. Back in 1970 only 16% of households had a credit card – a figure which is over 70% today.

When creditors start playing fast and loose with credit to consumers, things can end up getting out of hand. This is what happened in the Great Recession, largely driven by the housing market where lenders were handing out mortgages like candy – mortgages that simply weren’t sustainable for many consumers.

Other Important Bankruptcy Statistics

While the big-picture bankruptcy statistics of annual filings does give a lot of insight into why things are the way they are today, there are a variety of other figures worth knowing, including the following:

67.5%: The percentage of personal bankruptcies caused by medical bills (source).

204%: The percentage increase in rate of bankruptcy filings of those aged 65+ over 25 years (source). This figure is especially concerning because 10,000 Baby Boomers will continue retiring every day through 2021.

60%: The percentage of people who spend all or more than they earn (source). The problem pointed out by this statistic is that people are not actively saving if they’re spending all or more of their income, which means they have no emergency cushion when something goes wrong, which could trigger a bankruptcy filing.

66%: The percentage of people who would have trouble scrounging up $1,000 in an emergency (source). Like the previous statistic, this one just goes to show how vulnerable to “income shocks” people are. It doesn’t take much to drive people on the edge into bankruptcy.

24%: The percentage of Millennials who demonstrate basic financial literacy. Ouch.

This article has presented our opinion on the debt problems of Americans by taking a look at bankruptcy statistics and related numbers. If you’re in the midst of a bankruptcy filing or recently had one discharged and find you’re in need of financing a car purchase, there are options available to you. Day One Credit works with a network of  lenders who have special programs specifically geared towards helping bankruptcy filers get the car they need. Rather than viewing your bankruptcy as some kind of failure, we see it as taking a positive step to getting your financial life back in order and moving forward. A bankruptcy car loan is one way for you to immediately begin rebuilding damaged credit. Learn more in our Bankruptcy Car Loan Guide or get started today with our online application!

Last year 750,489 individuals filed for bankruptcy. This is a number that has thankfully been going down year after year as the Great Recession becomes an increasingly distant yet still very painful memory for so many people. But it does beg the question – what are the main reasons that lead people to declare bankruptcy? It’s not an easy decision to make because it does impact your credit history and score for years afterwards. For many, it is only done as an absolute, final resort when they’ve hit rock-bottom, which is never a good place to be. But knowing what it is that forces people to file bankruptcy can help anyone be more vigilant and hopefully avoid it themselves. Here are the top 7 reasons people declare bankruptcy:

Reason #1. Debt Collection Litigation

If you’ve ever seen other lists about the reasons people declare bankruptcy, you might have expected to see something like medical bills as the number one cause. But you have to dig a little deeper to really figure out what’s going on with bankruptcy filings. For example, you could have one and only one reason on the list – too much debt, right? What people want to know is more about the kinds of debts that make people file bankruptcy. In a way, “too much debt” just the big picture of the issue. What is it that actually triggers people to file? Most people have multiple kinds of debt, so what is it that suddenly makes their debts unmanageable? When you take a closer look, for many it is when a lawsuit is filed against them by one or more debts. That often ends up being the proverbial last straw that makes them realize they need to file bankruptcy.

The way this usually plays out is that a specific consumer debt is sold at a deep discount to a “debt buyer” who then aggressively pursues collection of the debt because they will make a handsome profit if they can collect even a portion of it (because they paid so little to take over the debt). These debt buyers often resort to litigation if their pestering debt collection efforts aren’t working.

Debt buyers file millions of lawsuits against consumers every year in their attempts to make a profit on the financial misfortunes of consumers. One study of this phenomenon, A Study of the Causes of Consumer Bankruptcy, found that for 78% of bankruptcy filers, it wasn’t about the amount of debt or all the debt collection calls they were getting, it was when debt collection litigation was started against them that made them declare bankruptcy. This is why many people argue that the most effective way to help prevent consumers from feeling like they have to file bankruptcy would be abatement of debt collection litigation.

The impact of all this debt collection litigation is huge. When a person has a debt collection lawsuit/judgement listed on their credit report, it can hurt their chances of getting a job. Background checks in the hiring process these days often include a credit check, and people with a debt collection lawsuit/judgement on their credit history is reason enough for many HR managers to not make the hire.

Reason #2. Medical Bills

Having identified the biggest of the reasons people declare bankruptcy, it is also true that one of the specific kinds of debt that triggers people to file is when they suddenly find themselves saddled with huge medical bills they weren’t expecting. Although there hasn’t been any recent research on this one, the classic study cited for it is one by Harvard University that found more than 60% of bankruptcy filings were driven by medical expenses in 2007, as opposed to only 46.2% in 2001.

The unfortunate way this scenario tends to run is that an unexpected medical incident prevents a person from working. When they lose their job, they lose their employer-provided health insurance coverage. That double-whammy of losing a job and losing health insurance is what forces many to declare bankruptcy in the face of huge medical bills.

The twist on this one that’s becoming increasingly apparent in recent years is the mounting number of older people who are filing bankruptcy:

“The rate at which Americans at least 75 years old filed for bankruptcy more than tripled from 1991 to 2016, while filings among those between 65 and 74 ballooned more than 200 percent, according to a recent study from a group of professors working with data from the Consumer Bankruptcy Project… More than 62 percent of respondents also indicated medical expenses were ‘a catalyst for bankruptcy.’ And 4 in 10 respondents indicated missing work for medical reasons was a primary factor in their decision to seek bankruptcy protections. (source).”

A more recent investigation into medical-related bankruptcies found that not much has changed even though the Affordable Care Act (Obama-care) helped a lot more people get health insurance. The same high percentage of bankruptcy filers are reporting medical expenses as a main cause for declaring bankruptcy (source).

Given the out-of-control cost of healthcare today, it’s not at all surprising that medical bills are among the major reasons people declare bankruptcy, or that it’s especially a problem for the growing number of retired people as the Baby Boomers are retiring at a rate of 10,000 every day!

Reason #3. Loss or Reduction of Employment

People who are just managing to get by with their debts based on their current job income can find themselves turning to bankruptcy if they lose their job. The phrase “one paycheck away from bankruptcy” rings true for all too many people. With the sudden reduction in their income from being laid off or let go, often with little in the way of emergency savings, declaring bankruptcy becomes the only way to keep creditors at bay and reduce or eliminate their worst debts.

As you might expect, the rise in unemployment from the Great Recession caused a huge spike in bankruptcy filings, with 1.53 million individuals filing bankruptcy in 2010. That was the peak, and that number has come down by half since then. But plenty of people are still at risk in spite of the longest post-recession economic recovery in history. After all, it’s only a matter of when, not if the next recession occurs.

Reason #4. Divorce or Separation

Most people underestimate the financial impact that happens when two people who were previously a single household become two separate households because of separation and/or divorce. There are legal fees to be paid for a divorce, which can be substantial if it is a contentious divorce involving a lot of litigation and the expensive attorney fees that go with it.

But the legal fees are the just the beginning. Each newly separate party now becomes responsible for all their own household expenses without the benefit of a second income. Add on alimony and child support payments and either party can find themselves really hurting financially. It’s also important to know that alimony and child support debt are not covered by bankruptcy, so people are still on the hook for those debts even when they file bankruptcy.

Reason #5. Excessive Credit Card Debt

Most people have some amount of credit card debt. Credit standards before the Great Recession had become very loose, which meant it was easy to get multiple credit cards with surprisingly high lines of available credit. Yes, some people are just not good about using credit. They rack up of a ton of credit card debt without thinking of the consequences until it’s too late. For others, however, the accumulation of credit card debt was a way of dealing with one of the other items on this list – losing a job, having unexpected medical expenses, going through a divorce, and so on. They were able to make ends meet for a time by playing the credit card game, but it’s not a strategy that can be sustained for long.

The good news is that unsecured credit card debt is among the easiest to reduce or entirely eliminate through the bankruptcy process. Filing for bankruptcy in these cases is often the best way to get your financial life back on track and heading in a better direction. It’s also worth noting that a lot of people try to avoid filing bankruptcy by getting into some kind of debt consolidation plan, of which there are no shortage available. But those plans often end up failing and only delaying the inevitable. If one of the root causes of your financial situation is poor budgeting and the inability to control spending, then a debt consolidation plan simply isn’t going to work over the long haul.

Reason #6. Unexpected Expenses (Disasters, Theft, Accidents)

This one is all about the sudden and unexpected loss of property that you have to replace. In many cases, this has to do with losing a home entirely or having a home severely damaged in some kind of disaster. This is another instance where insurance comes into play. Most home insurance policies do not cover some kinds of disasters. Floods and earthquakes are the two most common disasters not covered by home insurance. But you need to read your home insurance policy carefully to find out about other kinds of disasters that probably aren’t covered, such as nuclear accidents, landslides, mudslides, sinkholes and so on.

As you can imagine, it’s not just the expense of repairing or replacing your home, but also many or all of your personal possessions if those were destroyed as well. Losing everything can easily force anyone into bankruptcy. In other cases where people are living on the edge financially, even the loss of a single important piece of property or possession due to theft or an accident of some kind can be enough to lead to bankruptcy.

Reason #7. Student Loan Debt

There is more than $1.53 trillion in student debt floating around out there. It’s an ongoing challenge faced by one out of every four Americans. Like alimony and child support, filing for bankruptcy will not eliminate or reduce your student loan debt except in very rare cases of extreme hardship. But the constant presence of that large debt can be what leads many people to file bankruptcy so they can address their other debt concerns even though they’ll still have to make good on those student loans.

In the final analysis, it’s rare for just one of the items on this list to be the cause of someone filing bankruptcy. Most people could point to several of the reasons people declare bankruptcy as applying to them. If you are among the hundreds of thousands of people declaring bankruptcy this year and find you also need to get a car, please know that help is available! Day One Credit specializes in working exclusively with bankruptcy customers to help them get the car they need and can afford by finding them a bankruptcy car loan. It’s also one way to get back on track to rebuilding a better credit score whether you’ve filed for a Chapter 7, a Chapter 13, or have a recently discharged bankruptcy. If you want to learn more about how all of this works, please download our recently-published resource: Day One Credit’s Bankruptcy Car Loan Guide. If you need more information about bankruptcy car loans, please feel free to contact us, but if you’re ready to get your keys to a fresh start, go ahead and apply online today!