The bankruptcy blog

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!

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

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

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

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

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

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

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

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

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!

When people get to a point where they decide they need to file bankruptcy because their debts have become too much for them to handle, those who are unfamiliar with the process and what it involves typically have a lot of questions. One the most important questions many people want to know about is what will happen to their car when they file bankruptcy. This article outlines all the different possibilities so you can decide which option is right for you.

Choose Between Chapter 7 and Chapter 13 to File Bankruptcy

If you don’t know much of anything about filing bankruptcy, you should work with a qualified bankruptcy attorney to help you with the process.  One of the many things a bankruptcy attorney will help you with is deciding which form of bankruptcy filing is right for you. The two most common options for individuals is a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

A Chapter 7 bankruptcy is also referred to as a “straight” bankruptcy or “liquidation” bankruptcy. If you have significant non-exempt assets/property, those will have to be sold off or liquidated in order to pay down the debts being included in the bankruptcy. Property and assets typically considered exempt from this include your house (because you still need a place to live) and your car (because you still need to get around, commute to work, etc.). If you are still paying on a car loan for your vehicle, that debt may or may not be included in the bankruptcy (more on that later).

After liquidating non-exempt property/assets to pay creditors, any remaining qualifying debts will be wiped away entirely, giving you a kind of “clean slate.” There are, however, various debts that do not qualify to be included in a bankruptcy, such as students loans, alimony or child support payments you owe, and any recent federal/state/local taxes you haven’t paid. Chapter 7 bankruptcy is the best option for those whose income is limited enough that there’s basically no way they’d ever be able to repay their qualifying debts, which is why they get wiped away.

In a Chapter 13 bankruptcy, the idea is that your income is high enough that you just need some time in order to get caught up on your debts. The bankruptcy court acts as a go-between between you and your creditors to hit the “pause” button on your qualifying debts and set up a reasonable repayment plan. Over the course of 3-5 years, you’ll be able to get caught up on your debt payments. During that time, creditors are not allowed to start or continue any debt collection actions. The bankruptcy court consolidates the qualifying debts into a single monthly payment you pay to your bankruptcy trustee, who then distributes it among your creditors, meaning you don’t have to have any direct contact with them.

How Chapter 7 Bankruptcy Affects Your Car

If Chapter 7 ends up being the right choice for you to file bankruptcy, there are three basic options for what happens to your car if you’re still making payments on a loan for it, each of which is outlined below:

Surrender: If what you want to do is get rid of your car and the loan you’re still making payments on, you may be able to just surrender the car to the lender and include the car loan in your Chapter 7 bankruptcy filing. You may be able to literally walk away from the loan, even if you owe more on the loan than the car is worth. If the debt is included in the bankruptcy, then it will be wiped away. The downside to this option, of course, is that you then won’t have a car. So why would anyone ever choose this option? Because it’s a way of getting out from under the burden of a car you can longer afford. Surrender the car that’s too expensive for you when you file bankruptcy and then you have the option of getting a bankruptcy car loan for something you can afford.

Retain-and-pay: This is also common in a Chapter 7 bankruptcy. Your car loan is included in the bankruptcy, which means the lender can’t come after you, but you go ahead and keep making payments and hang on to the car. Yes, there will be a lien placed on the vehicle, but as long as you keep making your payments, you get to keep driving the car. Once you’ve paid off the loan, then you can get the lien removed so you’re free and clear. However, not all lenders will go for this type of arrangement. Some will demand what’s called a “reaffirmation agreement.”

Reaffirmation: Some banks and credit unions want you to “reaffirm” your car loan if you intend to keep driving your car during a Chapter 7 bankruptcy. It basically means you promise to keep making payments on your loan, and remain personally liable for the debt, which means your vehicle could get repossessed if you fail to make your payments.

Which of the above options is right for you? Talk it over with your bankruptcy attorney, who will help you decide which option you should go for, or which option you have to go for based on your situation and the lender who has your car loan.

How Chapter 13 Bankruptcy Affects Your Car

Remember that a Chapter 13 bankruptcy involves a repayment plan to help you get caught up on your debt payments. Below are the three basic options for what happens to your car and loan in a Chapter 13 bankruptcy:

Principal Reduction: This option is how you “cram down” your car loan. You can only do this if you took the loan out at least two-and-a-half years before filing bankruptcy. In this approach, the lender is willing to accept a reduction in the principle balance on the loan down to what the car is actually worth (fair market value). Instead of being “upside down” or “underwater” on the loan, where you owe more than the car is worth, after the cram down you’ll only owe what the car is worth. If you still owe $10,000 on the car but it’s only worth $7,000, the outstanding principal that you owe will be reduced or “crammed down” to $7,000.

Interest Rate Reduction: Another option is get the interest rate reduced on your loan. If part of your struggle to pay your car loan is because it has a high interest rate, this could be reduced by as much as 4-6%.

Arrears Catch-Up: If you’re several payments behind on your car and it hasn’t been repossessed yet, then you can take the total past due amount and stretch out repayment over the course of your Chapter 13 bankruptcy of 3-5 years. This can end up being a very small monthly payment that is easy to handle on top of the current monthly payment you have to continue making.

If you need to file bankruptcy as well as replace your car, Day One Credit is here to help. We’ve spent years developing a great network of lenders who specialize in serving bankruptcy customers. When you apply for a bankruptcy car loan through Day One Credit, we send your application out to all the lenders in our network because when they all compete against each other to get your business, you end up with the loan that fits your situation! Learn more by visiting our Why Day One page, find answers to common questions, feel free to contact us for anything else you want to know, or go ahead and apply now!