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Financial experts say the increase does not necessarily signal a weakening economy.
More Americans are turning to personal bankruptcy as mounting debt, elevated borrowing costs, and the expiration of pandemic-era financial assistance continue to strain household finances, according to new federal court data, NPR reports.
Financial experts say the increase does not necessarily signal a weakening economy. Instead, it reflects that more consumers facing prolonged financial hardship have reached the point where bankruptcy has become their most practical option.
“It’s telling us that consumers are having a harder time coping with their financial obligations,” Sasha Indarte, a finance professor at the University of Pennsylvania’s Wharton School, told the outlet.
Personal bankruptcy allows individuals who can no longer meet their financial obligations to seek court protection while restructuring or eliminating qualifying debt. Depending on the filing type, consumers may enter a court-approved repayment plan or have certain debts discharged. Filing also triggers an automatic stay that temporarily stops most collection efforts.
“Possibly the biggest benefit of petitioning the court for bankruptcy is that all your creditors then have to stop harassing you,” Mary Eschelbach Hansen, a bankruptcy economist at American University, said.
While bankruptcy remains on a consumer’s credit report for years, researchers say many people overestimate its long-term effect. Samuel Antill, an assistant professor at Harvard Business School, found that most filers begin rebuilding their credit within about a year after filing.
Experts note that bankruptcy filings plunged during the COVID-19 pandemic as stimulus payments, expanded unemployment benefits, and other federal relief programs helped many households stay afloat. As those programs ended and consumers continued grappling with inflation, higher interest rates, and accumulated debt, filings gradually returned to more typical levels.
Still, economists caution that bankruptcy filings should not be viewed as a standalone measure of the economy because they represent consumers experiencing the most severe financial distress rather than the financial health of households overall.
For some Americans, however, bankruptcy provides a path toward financial recovery instead of failure. Oklahoma City resident Rebecca Lessley, who filed for bankruptcy after losing her job and falling behind on debt payments, said learning that several friends had gone through the same process helped erase much of the stigma.
“I, in a way, feel a sense of relief,” Lessley said. “Maybe this is what I needed to get me back into a better position and to have a little bit more financial success.”
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Source: Black Enterprise
