Yahoo Finance Why Bankruptcies Increased in 2023 — And How Not To Let It Happen to You
Bankruptcy. The mere word can evoke shame, fear and dread — and for good reason. When you file for bankruptcy, your credit score takes a major blow, possibly dropping as much as 240 points, according to Debt.org. Additionally, bankruptcies stay on your credit report for years, scaring off lenders and cranking up interest rates.
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Nobody wants to be in a position where filing for bankruptcy is their only escape from debt, and yet, plenty of people have no other choice. 2023 was a particularly painful year in this regard; bankruptcies increased by 16.8% over 2022.
What happened? Why did so many Americans resort to bankruptcy last year, and how can you prevent yourself from falling down a similar path in 2024 and beyond?
Inflation, Layoffs and No More Stimulus Checks
Derek Jacques, a bankruptcy attorney at The Mitten Law Firm attributes the spike in consumer bankruptcy filings to three things: inflation, layoffs and the fact that Americans could no longer stave off grim financial realities with stimulus payments.
“Consumer bankruptcies have been on the rise for several reasons,” he said. “One is the fact that inflation was elevated significantly until only very recently. This really put a dent in the discretionary income of most middle-class income earners. Another factor has been the massive layoffs we have seen in some sectors, specifically tech. I have seen a rise in the number of people that would have filed for bankruptcy sooner, but they were able to utilize the government stimulus checks to stave that off for a bit.”
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Stick to Your Budget
If you don’t want to end up cornered into filing for bankruptcy, there are a number of smart moves you can make, including making — and more important, sticking to — a realistic and robust budget.
“I find many are able to sit down and create budgets, but following that budget takes much more discipline,” said Jacques. “Work on telling yourself ‘no’ more often in order to stick to your spending limits.”
Negotiate Your Bills
When budgeting, make sure you carve out enough for your bills, but before you do, see if you can’t get those bills lowered.
“You’d be surprised how many companies are willing to work with you on your bills, especially if you’ve been a loyal customer,” said True Tamplin, CEPF, founder at Finance Strategists. “Call and ask if there’s any way to lower your bill or if they have any hardship plans.”
Steer Clear of New Debt
Debt, and the sheer inescapability of it, is what leads people to file for bankruptcy. The more you have, the worse your situation becomes. Steer clear of taking on any more debt than you already have.
“When possible, avoid taking on new debt,” Jacques said. “If you don’t need something that you don’t have the cash for, then I would avoid it. You can always come back to it when you’re in a better financial position.”
Create an Emergency Fund
“This might seem like an old-school piece of advice, but I can’t tell you how many bankruptcies are caused by one major unexpected expense,” Jacques said. “By saving some money every week to plan for a rainy day, an unexpected expense won’t have to force you into bankruptcy.”
Communicate With Your Creditors About Your Financial Hardship
Creditors may be coming down on you hard when chasing you for what you owe, but this doesn’t mean they don’t want a relationship with you. They’re keen on keeping your business, so it’s helpful to communicate with them when you’re having trouble keeping up with payments.
“Creditors don’t want you to default,” Jacques said. “Most have alternative payment arrangements you can make with them in order to avoid fees and other issues. But your creditors won’t know that you’re experiencing hardship if you don’t talk to them about it.”
When Is Bankruptcy the Right Move?
When is bankruptcy the necessary and most solvent move you can make? How can you tell? Here’s where the support of a financial expert comes heavily into play.
“This decision is best left between the consumer and his financial advisor or bankruptcy attorney,” said Scott Barna, co-president at Stretto.
But you may also know it’s time when a financial disaster strikes out of nowhere — and you’re sorely unprepared.
“Personal bankruptcy is what we call an ‘event-driven catalyst’ that is most often used to pursue financial rehabilitation after a job loss, divorce, medical emergency, pending foreclosure or wage garnishment,” Barna said. “Typically, consumers do not file bankruptcy when they have high credit card debt alone, but many times this debt is an underlying condition that becomes even more unmanageable due to one of the events mentioned.”
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