Pandemic Impacts on Bankruptcy Filings and Car Loans

covid pandemic and bankruptcy

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

bankruptcy filings lagging 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

pandemic recession is different

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?

bankruptcy filings tsunami

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

need 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!

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. … Continue reading “Pandemic Impacts on Bankruptcy Filings and Car Loans”

Bankruptcy Car Loan Expectations: Keeping it Real

bankruptcy car loan expectations

If you find yourself needing a car when you’re in the middle of a bankruptcy, or even when you’ve had one recently discharged, finding a way to finance the purchase of a used car can become a major challenge. Many lenders won’t give you the time of day when they see the dreaded “B” word on your credit report. This can often mean you’ll need to seek alternative lenders to meet your financing needs, such as lenders who specifically work with bankruptcy car loans. But before you dip your toe into those waters, you should think about bankruptcy car loan expectations. While chances are fairly good you’ll be able to find what you need (especially if you work with the right experts), you’ll also want to have realistic bankruptcy car loan expectations.

Expectations About Lenders Working with Bankruptcy Customers

expectations with lenders

Lenders are in the business of making loans to people because they can make money doing it, but only if the loan recipient pays it all back and then some in interest charges. Each lender has to figure out how they’re going to assess the level of risk when making loans, which means they try to figure out who is most likely to make good on their loan commitment and making the monthly payments on it. Your credit score and credit history are the main tools available to lenders for making these kinds of decisions. Your credit report contains the facts of how responsible you’ve been with credit in the past and what kind of debt load you carry. If the lender sees too many “red flags,” then they will consider you too risky and deny your loan application.

Although your credit report reveals many aspects of your past behavior related to credit and debt, every lender is going to have their own standards about what they find to be an acceptable or unacceptable level of risk in potentially making a loan to you. Many lenders have decided that a credit score under a certain level or seeing a bankruptcy in your credit history are enough to disqualify you. These lenders are what you might call “risk-averse” because they want to ensure they’re going to get their money back with interest. To them, a bankruptcy means you’re more likely to default on a loan.

The Interest Rate Factor in Bankruptcy Car Loan Expectations

interest rates for bankruptcy car loans

When you’re looking to get a loan of any kind, one of the most basic things you want to know about is the interest rate or annual percentage rate (APR). This is important because it tells you how much you’re going to pay over the life of the loan for borrowing the money you need to make a purchase. Part of having realistic bankruptcy car loan expectations is understanding and accepting the fact that you will have a higher interest rate on your car loan that someone with great credit and no bankruptcy red flags on their credit history. But why is this the case?

As stated above, many lenders find bankruptcy customers too risky to work with. But there are lenders out there who are willing to make loans to bankruptcy customers. These are the lenders who understand that bankruptcy is a way to get yourself back on track financially, so they think of bankruptcy in a more positive way than risk-averse lenders. And yet they also recognize there really is more risk when lending to bankruptcy customers. In order to compensate for the increased risk they’re taking on by making a loan to you, they charge a higher interest rate. How much more is going to vary widely from lender to lender.

At Day One Credit we help find you a bankruptcy car loan by tapping into our strong network of multiple specialized lenders who are willing to work with bankruptcy customers. The median interest rate for such loans is around 18%. Is that significantly higher than used car loans for customers with great credit? Yes, it is, and it representative of the risk that lenders factor in when financing customers with open or recently discharged bankruptcies.

Expectations About the Car You Will Buy

right cars for bankruptcy

Another area where you will be better off with realistic bankruptcy car loan expectations is what kind of car you will buy. If you’re in the middle of a bankruptcy or recently had one discharged, you probably don’t have a ton of money lying around to put towards the purchase of a car. If somehow you do, then go for whatever you want. But if money is tight, you have to be smart about the kind of car you buy.

In our opinion and experience working with bankruptcy customers, you should keep yourself from dreaming about buying some kind of high-end luxury car. You probably can’t afford one. Besides the high price of the vehicle itself, everything else related to the car will also be more expensive. The insurance will be more expensive. Repairs and maintenance will be more expensive. Even the fuel you put in the gas tank could be more expensive if the vehicle requires premium-grade gasoline. If you’re trying to get back on track financially after bankruptcy, overcommitting yourself by trying to purchase a luxury car you can’t afford simply isn’t going to help you. And if money is tight and your credit has taken a major hit from bankruptcy, you probably won’t get approved for a loan large enough to even attempt purchasing a luxury car.

In fact, it is our opinion at Day One that you shouldn’t even try to buy a brand-new car. They’re more expensive just by being the most recent model, and then you take a really big hit on depreciation as soon as you drive a new car off the lot. The car’s value will drop by 15%–20% in the first year and for several more years, which means you’ll probably be “underwater” on the car for years, meaning you owe more on the car loan than the car is worth. This is not the position you want to be in with a bankruptcy on your credit report.

But we also don’t recommend buying an old used clunker. Those kinds of cars can also end up costing you more than they’re worth because of the constant stream of expensive repairs they often require to keep them running. What we do recommend is a late-model (less than five years old) used car in great condition with lower mileage. This is the kind of car that gives you the most bang for your buck. It will serve you well for good long time and won’t likely need a lot of repairs in the near future. Please read more about best car choices for bankruptcy car loans.

Here at Day One Credit, we take the time to understand what you need in a vehicle and what resources you have available for making a purchase. Our goal is to find you an excellent used car that you can really afford, and find you the right bankruptcy loan from our network of lenders so you can buy it. We call that a win-win scenario!

The Credit Repair Aspect of Bankruptcy Car Loan Expectations

credit repair expectations

Part of why a bankruptcy car loan may be a good idea for you is the role it can play in repairing and restoring your credit during and after bankruptcy. But once again, it’s best to have realistic expectations about this.

When you’re in the midst of a bankruptcy, as well as after having one discharged, your credit score is probably quite low—possibly the lowest it’s ever been depending on how it declined in the period of time leading up to your bankruptcy filing. Here’s the catch-22 of fixing your credit: You have to prove to the credit bureaus you can handle credit responsibly at a time when you likely have a lot less credit available to you, or none at all. You need to get some new credit to show you can use it responsibly, but this can be a major challenge given how many lenders simply won’t work with bankruptcy customers as previously described. This is when a bankruptcy car loan from the right lender can help put you on the path of showing a whole new you with new credit and responsible behaviors.

But it’s not a magic pill that will automatically make everything better. The bankruptcy “red flag” is going to remain on your credit report at least seven years. The bankruptcy car loan can help your credit score move in an upward direction, but only if you are very careful to make every monthly payment on time. This is part of why we emphasize making sure you buy a car you can really afford. Late or missed payments will only further reduce the credit score you’re trying to raise! Making those on-time payments every month is the key to seeing your score begin to move in the right direction.

The Day One Credit Approach to Bankruptcy Car Loan Expectations

bankruptcy lawyers we recommend

Our approach to bankruptcy car loan expectations at Day One is simple: We want to help you get the car you need with a loan that’s going to work as well as possible for you. But we can’t work with everyone. Listed below are the eligibility requirements we need to see before we can try to help you find a bankruptcy car loan:

Income: We want to see a minimum gross monthly of income of $2,200 per month as shown on either your employer’s W-2 forms or 1099 forms if you’re self-employed.

Bankruptcy Status: To be eligible for a bankruptcy car loan, you must have already filed your bankruptcy or had it recently discharged. We just need to see your case number (Chapter 7), approved payment plan (Chapter 13), or your discharge.

Valid Driver’s License: Your driver’s license must be up-to-date and not suspended or you won’t be able to register a vehicle at all to begin with.

And we’ve also made the whole process as fast and as convenient as possible for you, including the following features and benefits:

Little or no money down: It’s always better for you if you can make as much of a down payment as possible, but if you can’t, that’s okay too. Day One can find most customers bankruptcy car loans that don’t require any down payment at all.

No need to wait: You don’t have to wait until your bankruptcy is finalized or discharged. You can apply as soon as you have your initial bankruptcy papers or a case number. Note, however, that in a Chapter 13 you will also need written approval from your trustee to take on a new loan.

Great cars available: The same vehicles available to everyone else are also available to you. We strongly recommend a late-model used car in great condition with low mileage that you can afford without stretching your budget.

VIP treatment: Unlike the lenders who look down their noses at you when they see a bankruptcy on your credit report, we give you the VIP treatment we think everyone deserves, regardless of their credit history. We’ll give you our full attention and show you the same courtesy and respect we would show anyone.

Ready to learn more? Check out our common questions page, get in touch through the contact us page of our website, or give us a call directly at 855-475-4725. You can also go ahead and get started by applying online now!

If you find yourself needing a car when you’re in the middle of a bankruptcy, or even when you’ve had one recently discharged, finding a way to finance the purchase of a used car can become a major challenge. Many lenders won’t give you the time of day when they see the dreaded “B” word … Continue reading “Bankruptcy Car Loan Expectations: Keeping it Real”

Should I Buy a Car with an Open Bankruptcy or Wait for a Discharge?

buy a car with open bankruptcy

A question that comes up frequently has to do with the timing of buying a car when there is a bankruptcy involved. Should you buy your next car when your bankruptcy is still open, or should you wait until you receive your bankruptcy discharge? Most people tend to think the answer to this question surely must be that it’s better to wait until you receive your discharge. After all, when you receive your discharge, then the bankruptcy is over and it must be better to buy a car when the bankruptcy is over, right? This article provides guidance on how to answer this question because it’s not as simple as you might think!

You Can Wait for a Discharge, but Why?

no reason to wait

If your car dies while you have an open bankruptcy, the answer to the question is clear. You can’t wait for your bankruptcy discharge because you need a car now, unless you can manage to get by on public transportation or asking friends and family for rides everywhere you need to go. That’s not going to work for most people, so waiting for a discharge won’t even be an option in those cases.

Another basic assumption here is that you’ll need to finance your purchase. Most people with an open bankruptcy obviously don’t have thousands of dollars lying around to buy a car. This is what makes buying a car during a bankruptcy tricky. Many lenders won’t give you the time of day with an open bankruptcy, which is why you might need help finding a bankruptcy car loan.

But what if you could wait to buy your next car. Should you? Is there any advantage to waiting for your discharge? Now the answer becomes maybe. The only advantage to waiting is if you can realistically save up money for a bigger down payment as you wait for your discharge to happen. But that’s the only reason. Otherwise, there is literally no reason to wait.

The Reason Waiting for a Discharge Doesn’t Help

discharge does not help

At this point, you might be scratching your head, wondering why waiting for a discharge doesn’t help. You think if the bankruptcy is over, more lenders will be willing to give you a car loan, right? Wrong, unfortunately. It’s a scenario many people find out the hard way, and it goes like this. You’ve patiently waited to finally receive your bankruptcy discharge because you want to buy your next car. You find the vehicle you’re interested in and go to your bank or credit union to find out what kind of loan you can get. But the lender rejects you because of your bankruptcy. They say you won’t be considered for a car loan until two years have passed after you received your discharge. Needless to say, this is very disappointing and frustrating for the people who have been waiting for their bankruptcy discharge thinking it would help them get a car loan.

So why doesn’t getting your bankruptcy discharge make a difference? Why do so many lenders want to wait two more years after your discharge before they’ll even consider making a loan to you? There’s no good reason other than it’s the tradition that developed as a way to mitigate risk in their loan operations. Lenders view the bankruptcy customer as a much riskier proposition than lenders with good credit and without a bankruptcy. Most lenders are very “risk adverse.” They want to lend money knowing they’re going to get it back, and then some in the form of interest. The look at a consumer’s past history (credit report) to determine how risky a loan to that person will be. Bankruptcy is seen by them as a such a big red flag that they want to see how you handle paying your bills for at least two years after a bankruptcy discharge to make sure you’ll be able to handle making loan payments.

Buying Before Your Discharge Might Actually Help

buying before discharge

At Day One Credit, we tap into a strong network of lenders who have special lending programs designed specifically for bankruptcy customers, including those with an open bankruptcy and those with a recent discharge. You will pay higher interest rates for a bankruptcy car loan because of the higher risk the lender is taking on, but Day One will help you find the loan that fits your situation. It has also been our experience that in some cases, the best rates we can find on bankruptcy car loans are for people whose bankruptcy is still open and not yet discharged.

This is why, in our opinion, waiting for a discharge doesn’t help except for coming up with a larger down payment, which is always a good thing to do if you can. Lenders like larger down payments, and you end up paying less interest the less you finance, so it’s a win-win on that front. If you’d like to make the most of your fresh start, check out our article Your Life After Bankruptcy: 7 Tips for Moving Forward. But we can also find bankruptcy car loans for most customers that don’t require any down payment at all.

Finding a Bankruptcy Car Loan through Day One Credit

day one credit bankruptcy car loan

At Day One Credit, we make it as easy as possible to help you find a bankruptcy car loan when you need one, whether it’s whether your bankruptcy is open or recently discharged. Here’s how it works:

Get Educated: Check first with your bankruptcy attorney in order to determine whether or not a bankruptcy car loan is a good idea. If it is, we’ll be happy to help!

Apply: All you have to do is fill out our quick online application, which will take you less than five minutes. We’ll review your information and contact you if we need to clarify anything. Then we send your application out to our full network lenders. When their offers come in, we select the one with the best terms to present to you.

Find Your Ride: Once you find your bankruptcy car loan, then you’re free to check out our selection of late-model used cars with low miles and in great condition to find your next ride!

Day One Credit works exclusively with bankruptcy customers, and our team has years of experience helping people find financing for a car purchase in spite of an open or recently discharged bankruptcy. Got questions? We’re always happy to help you understand your options. Check out our Common Questions page, or give us a call at 855-475-4725!

A question that comes up frequently has to do with the timing of buying a car when there is a bankruptcy involved. Should you buy your next car when your bankruptcy is still open, or should you wait until you receive your bankruptcy discharge? Most people tend to think the answer to this question surely … Continue reading “Should I Buy a Car with an Open Bankruptcy or Wait for a Discharge?”

Bankruptcy Statistics: Understanding Bankruptcy by the Numbers

Consumer Bankruptcy Statistics

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

bankruptcies are on the rise

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

over time bankruptcy trends

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:

consumer bankruptcy statistics over time

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):

unemployment statistics

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:

bankruptcy filings by the numbers

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

important bankruptcy data

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!

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 … Continue reading “Bankruptcy Statistics: Understanding Bankruptcy by the Numbers”

Top 7 Reasons People Declare Bankruptcy

top reasons for bankruptcy

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

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

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

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

divorce

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

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)

unexpected expenses

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

student loans

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!

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? … Continue reading “Top 7 Reasons People Declare Bankruptcy”

Your Life After Bankruptcy: 7 Tips for Moving Forward

life after bankruptcy tips

Once you file for bankruptcy, you have some breathing room. Your creditors will stop trying to collect the debts you owe them as the bankruptcy process sorts out what is going to happen with these debts depending on whether you filed for a Chapter 7 or a Chapter 13 bankruptcy. And when your bankruptcy is eventually discharged, you’ll feel even freer when your worst debts are reduced, eliminated, or brought back up to date. But it’s also important to make the most of your life after bankruptcy by doing things a little differently to hopefully ensure it never happens to you again.

After Bankruptcy, Make the Most of Your Fresh Start

fresh start tips

Deciding to file for bankruptcy is an agonizing event for most people, even when what causes you to file is something totally out of your control. But the best way to think of bankruptcy is how it gives you a chance to make a fresh start regardless of how you got to this point. Once you file, your life after bankruptcy is a big opportunity to do the important work of getting your financial life back on track and moving in the right direction. Keep the following 7 key tips in mind:

Tip #1: Spend Less Than You Earn

spend less

The most important thing you can do after bankruptcy is change your overall financial pattern. Your overriding goal has to be spending less than you earn. If you go right back to spending all or more than you earn every month, you’ll soon find yourself once again on the edge of financial disaster. Granted, there are things that happen beyond your control that can throw a wrench into the works, but if you keep your eye on spending less than you earn, you’ll be able to build up an emergency cushion of savings to get you through rough patches when they come up.

Tip #2: Open a Savings Account

savings account

If you can get used to the previous tip, then you need to put the money you save somewhere – and forget about it until and only if you absolutely need it. Having a separate savings account that isn’t easily accessible is a great way to do this. Adding just a little bit to a savings account on a weekly or monthly basis will add up quicker than you think, and could be a lifesaver when something unexpected happens.

Tip #3: Use Less Credit

less credit

Few people can get by on an all-cash budget, but if you can then more power to you. The only problem with this approach is that once you’ve declared bankruptcy and your credit score is still damaged, one of the few ways you can easily improve it is by getting a new line of credit and using it responsibly. When you pay for everything in cash, nothing is reported to the credit bureaus and it will take your credit score much longer to recover. But if you’re the type of person who has trouble managing credit wisely, then the less you use it, the better.

Tip #4: Be Careful with Credit Repair Services

credit repair services

Many people want to jump-start rebuilding their credit after bankruptcy and turn to one of the many different offers available from credit repair services. Please be careful before doing this! Many credit repair companies are not legitimate. Learn more in our previous article: Do Credit Repair Services Work?

Tip #5: Better Budgeting

budgeting

It’s hard to improve your financial life after bankruptcy if you don’t get a firm grasp on how you tend to spend and making a real plan for your monthly spending. Yes, you need to create a budget and then stick to it with as much consistency as you can manage. You can do this in either a low-tech or high-tech way as it suits you best. US News and World Report has a great list of 10 Simple and Free Budgeting Tools.

Tip #6: Pay Bills On Time

bills

If you regularly pay recurring bills late, such as your utilities, these are often reported to the credit bureaus and hurt your credit score. Make paying your bills on time every time your goal!

Tip #7: Educate Yourself

educate yourself

Basic financial literacy and household budgeting are mystifying topics to many people because they haven’t been taught in schools in decades. But you can educate yourself. Check out 7 Free Online Courses to Improve Your Financial Literacy or try one of several different Financial Literacy Games for a lighter approach (the ones listed there are designed for kids, but that probably makes them especially fun, too).

Yes, there is life after bankruptcy. As it turns out, the fresh start bankruptcy gives you is the perfect time to adopt the seven tips listed above to improve your financial health. And if you want to quickly rebuild your credit score with a new loan, consider finding financing for a car purchase through Day One Credit. We work exclusively with bankruptcy customers to help them make the most of their fresh start, whether it’s a Chapter 7, a Chapter 13, or a recently discharged bankruptcy. Feel free to contact us for more information, or jump in and fill out our online application today!

Once you file for bankruptcy, you have some breathing room. Your creditors will stop trying to collect the debts you owe them as the bankruptcy process sorts out what is going to happen with these debts depending on whether you filed for a Chapter 7 or a Chapter 13 bankruptcy. And when your bankruptcy is … Continue reading “Your Life After Bankruptcy: 7 Tips for Moving Forward”