Federal aid has so far averted personal bankruptcies, but problems loom

Nearly 40% of households earning less than $ 40,000 a year had already lost at least one job in May, according to the Federal Reserve, which has closely analyzed household finances. This compares to just 19 percent of households earning $ 40,000 to $ 100,000, and 13 percent of households earning more than $ 100,000 per year.

A survey conducted in May by the Census Bureau further showed that younger households, and those with less education and lower incomes, were the most likely to lose income during closings. They were also more likely to say they couldn’t pay their rent or mortgage and had requested forbearance.

Jenny Doling, a consumer bankruptcy lawyer in San Diego, said consumers whose debts have started to snowball are generally better off seeking bankruptcy protection immediately. This is because bankruptcy automatically interrupts creditors’ collection efforts, giving insolvent consumers a safe place to work out their three to five year repayment plans and potentially save important assets like a home or car.

But for many, the idea of ​​bankruptcy comes with the threat of stigma.

“Filing for bankruptcy, for consumers, is kind of an admission that you’re a financial failure, and people just can’t admit it,” said John Rao, an attorney at the National Consumer Law Center in Boston. “They always think they can get away with it one way or another.”

People are also shocked when they hear that the cheapest consumer bankruptcy case, a liquidation, will likely cost around $ 1,500. In 2005, amid fears that spending consumers would abuse the bankruptcy system, Congress tightened laws, raising the cost of a case and requiring that legal fees be paid up front. The following year, the number of cases fell to around 600,000 from over two million in 2005, but started to climb again in the aftermath of the 2008 financial crisis. Last year, 752,160 cases were filed; this year, if deposits continue at their current rate, they will be 590,854 by the end of December.

As consumers struggle, they often look to their credit cards to make ends meet, thinking they’ll pay off the balance when they’re called back to work. In the meantime, they only make the minimum monthly payment required.

Each month’s unpaid interest of 20% or more is then added to their principal balance, causing their debt to inflate even if they don’t buy anything.

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