The first nine months of 2009 saw an elevated number of personal bankruptcy filings, in fact the highest since 2005, when bankruptcy code changed. The new bankruptcy code made it more difficult for individuals to qualify for bankruptcy and created a rush to file before the laws took effect. This rush made the number of bankruptcies filed considered "artificially high," which causes the 2009 numbers to appear even more staggering.
There were a total of 1,046,449 consumer bankruptcies from January 1 to September 30 of this year, whereas 2005 was just slightly higher with 1,350,360 personal bankruptcies filed. September's bankruptcies alone were up 4% from August of this year and over 40% from September 2008. By year's end, experts estimate the total number of bankruptcies to reach 1.4 million, a 30% increase from the 2008 total.
Last year, 37.6% of personal bankruptcies reported the cause for filing as job loss or an involuntary cut in hours or wages, and that number is expected to rise considerably for 2009. The combination of credit card debt and mortgage debt is leading to more delinquencies than usual as well, creating the majority of personal bankruptcies instead of the typical reason: job loss. Unemployment will continue to elevate the number of personal bankruptcy filings in 2010 and 2011, however, says the Institute for Financial Literacy. As experts also predict, the job sector will take longer than other sectors to improve along with the strengthening economy. September saw a high of a 9.8% unemployment rate nationally, up from 7.2% in December 2008.
Rising medical bills also contributed to between one-third and one-half of all personal bankruptcies. Without adequate coverage for necessary medical procedures, many borrowers find themselves in massive debt with no way to repay it.
Additionally, because of the 2005 code change, it is harder for consumers to file under Chapter 7 bankruptcy, which extinguishes all unsecured debt and forces many to file a Chapter 13 instead. During a Chapter 13, a borrower is allowed to stay in their home and get back on their feet financially within a few years, while repaying a portion of their unsecured debt. Still, 71% of personal bankruptcies so far in 2009 have been Chapter 7, an increase from 66.5% in 2008, according to the American Bankruptcy Institute.
Experts agree that the people hit hardest by the current economic crisis are those who have not seen such financial problems historically. There were more individuals who have college degrees and earn more than $40,000 a year filing for personal bankruptcy in 2008 than ever before.
Furthermore, the country as a whole has been affected greatly in terms of overall debt compared to income. Until 1985, the debt to income ration in the United States had stayed consistent at around 60%, but that rate has increased to upwards of 130% today. Additionally, Americans' debt compared to GDP has traditionally been around 20%, but the past few years have seen that number rise to a shocking 100%, showing a fivefold increase.
These statistics reinforce the severity of the economic crisis as well as how far-reaching it has truly become. Now more than ever, bankruptcy should be considered as a means for homeowners that have exhausted all other avenues as a means of obtaining a fresh start.
P&P Law can assist you with foreclosure prevention or a bankruptcy if you find yourself among those struggling to keep up with mortgage payments. Please contact us with any questions or concerns about bankruptcy or foreclosure prevention!
