The fear of bankruptcy holds too many people back

The mystery is not why so many people file for bankruptcy each year. That’s why more people don’t.

Each year, only a fraction of Americans who could benefit financially from bankruptcy actually seek redress. Economists say some don’t file because collectors don’t aggressively pursue them, while others may strategically delay filing because bankruptcy might benefit them more in the future.

Many bankruptcy lawyers have a much simpler explanation: fear, a lack of information, and inappropriate optimism prevent people from making a fresh start.

A temporary break

About 14 percent of U.S. households – or roughly 17 million – owe more than they own, according to estimates from the Federal Reserve Bank of New York. Many of these households could benefit from debt relief, but less than 1% of U.S. households file a claim bankruptcy every year. Last year, there were 752,160 personal bankruptcy declarations. Researchers are calling this gap “missing bankruptcies” – deposits that might be happening, but are not.

Now, there is an additional set of missing bankruptcies: cases that people would normally have filed in recent months, but didn’t. Bankruptcy filings fell dramatically in the second quarter of this year, to about 60 percent of the previous five-year average.

Courthouses have been closed with pandemic closures, making it more difficult for creditors to pursue wage garnishments and garnishments. These are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy lawyer in Lynchburg, Va., And co-author of Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the United States Bankruptcy Code.

Borrowers have benefited from various forms of coronavirus relief, such as suspended payments on federal student loans, mortgage forbearance and expanded hardship options for loans and credit card accounts. The $ 600 weekly hike in unemployment checks, which expired in July, also kept many people afloat, Cox says.

Decrease in unemployment benefits, along with reopening courts and high unemployment, mean the lull in bankruptcy filings is likely temporary, said Jenny Doling, a bankruptcy lawyer in Palm Desert, Calif., who sits on the Chapter 13 advisory committee. from the American Bankruptcy Institute.

She is concerned that people are waiting too long to file. Too often, people drain retirement funds or other assets that would be protected in bankruptcy to pay off debts that will eventually be written off, she says. Deferring bankruptcy can also make it more difficult to get the $ 1,500 needed to file a typical case.

You won’t lose it all

Cox says many of his customers delay filing because they fear losing their cars, homes, and other property. They are pleasantly surprised that they are not stripped of everything they have, he says.

“There’s a misconception about how bankruptcy works and what it would cost you,” Cox says.

The vast majority of people who file the most common type of bankruptcy, Chapter 7, do not have to give up any of their assets. The types and amount of assets you can keep vary by state, but typically include clothing, business tools, wedding rings, and at least some equity in your home. A few thousand dollars of equity in a car is usually also protected. If you have assets that would not be protected in Chapter 7, you can apply for a Chapter 13 repayment plan instead.

You can get credit again

A bankruptcy filing stays on your credit reports for up to 10 years. But credit scores can start to recover soon after you deposit. It is possible to get a VA or FHA mortgage two years after bankruptcy. Most loans require you to wait at least four years.

People can start rebuilding their credit a few months after they are released from bankruptcy by obtaining secured credit cards, which require a deposit, or credit loans, available from some credit unions, community banks and online. .

The problem of anxiety – or unrealistic optimism

Debt often leads to anxiety and depression that make it difficult to act, Cox says. Many of her clients arrive at their first meeting with grocery bags full of unopened bills.

But misplaced optimism can also be a problem. The same hope that drives people into too much debt can also cause them to delay the math, he says.

“You always think, ‘Our income is going to go up, things will be better in the future,’ Cox says.

Anyone struggling with debt should now consider consulting a bankruptcy attorney, Doling says. The first visit is often free and references are available from the National Association of Consumer Bankruptcy Lawyers. Consulting a lawyer doesn’t require you to file, but it could help you avoid costly mistakes if you later decide it’s your best option.

“The people who fare much better in bankruptcy are the ones who came in and got advice early on,” Doling said.

Liz Weston is a columnist at NerdWallet. She is a Certified Financial Planner and author of five money books including “Your Credit Score”. Read more

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