Filing for bankruptcy

It’s often an overlooked last resort

Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief.

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Bankruptcy trends Roughly 17 million U.S. households owe more than they own, according to the Federal Reserve Bank of New York. Many households could benefit from having their debts wiped out, but fewer than 1% of U.S. households actually file for bankruptcy each year.

Researchers refer to this gap as

“missing bankruptcies.” Bankruptcy filings dropped dramatically in the second quarter of this year, to about 60% of the average for the previous five years.

Courthouses were shuttered by pandemic closures, which made it harder for creditors to pursue foreclosures and wage garnishments. Those are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy attorney.

Borrowers have benefited from various forms of coronavirus relief and a bump in unemployment checks, which expired in July. Those lower jobless benefits, along with the reopening of courts and continued high unemployment, mean the lull in bankruptcy filings is likely temporary, says Jenny Doling, a bankruptcy attorney who serves on the American Bankruptcy Institute’s Chapter 13 Advisory Committee.

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Don’t delay Doling worries people will wait too long to file or drain retirement funds or other assets that would be protected in bankruptcy to pay debts that will ultimately be erased, she says. Putting off bankruptcy also can make it harder to come up with the $1,500 needed to file a typical case.

Cox says many of his clients delay filing because they fear they will lose cars, homes and other property. But Chapter 7 bankruptcy protection doesn’t require most people to give up any possessions. The property you can keep varies by state, but can include clothing, professional tools, wedding rings and at least some equity in a home and car. If you have assets that aren’t protected in Chapter 7, you could file for a Chapter 13 repayment plan instead.

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Rebuilding A bankruptcy filing remains on credit reports for up to 10 years. But credit scores can start to recover soon after you file.

People can start to rebuild credit a few months after their bankruptcy case is discharged by getting secured credit cards, which require a deposit, or credit-builder loans, available from some credit unions, community banks and online.

It’s possible to get a VA or FHA mortgage two years after a bankruptcy. Most loans require you to wait at least four years.

The first consultation with a bankruptcy attorney is often free, and referrals are available from the National Association of Consumer Bankruptcy Attorneys.