Personal Bankruptcy Filings Surge 20% in 2023: How to Avoid It

The number of Americans who have filed for personal bankruptcy has been up nearly 20% since the beginning of the year, according to data from legal services firm Epiq. In March, Chapter 7 filings, where debts are discharged, were up 13%, and Chapter 13 filings, where filers plan to repay debts, were up 24%.

The surge in bankruptcy filings reflects the economic hardship that many people are facing amid high inflation and interest rates. Many consumers are struggling to keep up with their credit card, auto loan and student loan payments, while others have lost their jobs or income due to the pandemic.

While filing for bankruptcy can alleviate serious financial pressure, it can also impact credit scores for up to ten years and make it harder to secure housing, loans, jobs and even security clearances. Therefore, experts advise consumers to explore other options before resorting to bankruptcy.

“There are definitely alternatives to bankruptcy that are super successful if done right,” said financial attorney Leslie Tayne, who specializes in debt resolution.

Some of the alternatives that consumers can consider include:

• Balance transfer cards: These are credit cards that offer a low or zero interest rate for a limited period of time, usually 12 to 18 months. Consumers can transfer their high-interest credit card debt to these cards and pay it off faster and cheaper. However, they need to be aware of the balance transfer fees and the interest rate that will apply after the promotional period ends.
• Debt consolidation loans: These are personal loans that can be used to pay off multiple debts at once, leaving only one monthly payment at a lower interest rate. Consumers can save money on interest and simplify their debt management. However, they need to have a good credit score to qualify for these loans and avoid taking on more debt after consolidating.
• Debt settlement: This is an agreement between a consumer and a creditor to pay off a reduced amount of debt, usually in a lump sum or in installments. Consumers can save money on their debt balance and avoid bankruptcy. However, they need to be prepared for the negative impact on their credit score, the tax implications of forgiven debt and the potential legal actions from creditors who do not agree to settle.
• Debt resolution: This is a broader term that encompasses various ways of renegotiating debt terms with creditors, such as lowering interest rates, extending repayment periods or waiving fees. Consumers can reduce their debt burden and avoid bankruptcy. However, they need to have a professional who understands how to negotiate with creditors and protect their rights.

If consumers are contacted by debt collectors, they should not feel pressured or promise to pay what they cannot afford. Instead, they should ask for proof of the debt, write down the information they receive and seek legal advice if necessary.

“Bankruptcy is not always the best option for everyone,” said Tayne. “It’s important to weigh the pros and cons of each alternative and find the best solution for your situation.”

Reference:

• How to avoid bankruptcy in 2023: Expert tips and advice | Moneywise | May 20, 2023
• Debt relief options for 2023: What you need to know | Bankrate | May 18, 2023
• Bankruptcy alternatives: What are they and how do they work? | Credit Karma | May 17, 2023