How many people file bankruptcy?

According to a new Fitch Ratings reports, personal bankruptcies, including Chapter 7 and Chapter 13 bankruptcies, have had four straight years of declines. Personal bankruptcies fell an estimated 12% in 2013 and are expected to drop another 8-10% in 2014. Experts expect the decrease to level off after 2014.

While bankruptcy numbers are down, experts estimate 1.21 to 1.25 million Americans will file for bankruptcy this year, down from 1.38 million last year. Who files bankruptcy? It’s not who you think. Hundreds of thousands of people are forced to file bankruptcy, not because they frivolously overspent, but because they had very specific financial challenge: lost employment, divorce, or a serious illness.

Why are personal bankruptcies on the decline?

Experts give a variety of reasons: the economy is improving, banks are not foreclosing on mortgaged properties as aggressively as in prior years, or consumers have sought alternatives to bankruptcy. Additionally, many financial analysts point to the tightening of the underwriting standards, which have made financial institutions less likely to offer large credit lines to consumers.

One widely held belief is that the economy has improved enough that consumers have increased employment opportunities and are now repaying their debts they accumulated during the Great Recession, thus avoiding bankruptcy.

Bankruptcy more expensive and more difficult

Another issue is the cost of bankruptcy. In a recent article in CNNMoney, the author notes that there are hundreds of thousands of Americans who may wish to file bankruptcy but who are simply too broke. For instance, the cost of Chapter 7 bankruptcy is more than $1,500, according to recent research submitted to the National Bureau of Economic Research. There may be over 200,000 debtors who are unable to pay this amount to file.

Why is the cost so high? The cost to file the bankruptcy petition and the appropriate forms, even if you do not high a bankruptcy lawyer, is $300 for a Chapter 7 bankruptcy. Debtors are also expected to take a debtor education course, and a pre-bankruptcy credit counseling course, which adds an additional $85 in expenses. If a debtor decides to hire a lawyer the costs can be another $700 to $2000.

Why has the cost risen so much? Much of the extra cost can be attributed to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which aimed to reduce the number of bankruptcies. The new law did lead to a drop in personal bankruptcies, as intended, but according to one study, the average income of the filers increased, leaving experts to argue that the new bankruptcy law may have "priced out many of the consumers who are least able to afford the fees."

Why do attorneys charge so much money? Many bankruptcy lawyers argue the new laws have added a substantial amount of paperwork and take more time.

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