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Stratford Bankruptcy Blog

The COVID-19 virus could influence bankruptcy rates

The spread of the COVID-19 virus is weighing heavily on the minds of Americans. As schools, restaurants and other establishments temporarily close, Connecticut workers have even more to worry about. People living paycheck to paycheck or those who are already behind on bills may want to consider their current financial positions and whether it might be time to plan for bankruptcy in the future.

As people wait for their places of work to reopen, it is possible that many people will not have a job to return to. The economy is likely to slow down in the face of this unavoidable situation and will strain profits in businesses both small and large. This may lead to layoffs.

Bankruptcy -- credit card debt is setting new records

American consumers set a brand new record in 2019, but it is not one that many people would be proud of. Last year, adults took on another $77 billion of credit card debt. When asked about what they would do to get rid of credit card debt, a number of people said they would be willing to spend time under house arrest if it meant freedom from that debt. These individuals might not realize that bankruptcy is a much less drastic measure that can still create opportunities for financial freedom.

The figure of $77 billion comes from WalletHub's 2020 Credit Card Debt Study. The study showed that 2019 actually started off on a good foot. In the first quarter of the year, consumers -- including those in Connecticut -- paid off $38.2 billion in credit card debt. The progress did not last long at all, and consumers added $35.5 billion, $21.5 billion and $57.9 billion over the second, third and fourth quarters respectively. WalletHub predicts that Americans are set to add another $85 billion in 2020.

Bankruptcy -- mortgages can make consumer debt worse

Buying a home is an accomplishment that homeowners should be proud of, but it is also an enormous undertaking. Houses require regular maintenance and upkeep, and since nothing in life is perfect, most homeowners in Connecticut can expect to deal with unexpected repairs at least once. When faced with these costs, homeowners usually end up taking on at least some consumer debt, which could ultimately lead toward bankruptcy.

Mortgages are not considered consumer debt, which are things like credit cards, medical bills and student loans. However, mortgages frequently contribute to consumer debt. In a survey by Discover, 14% of respondents said that home repairs were their biggest sources of consumer debt. Considering that 60% of adults in America say their debt is a burden, this only adds to the stress felt by the 12.4% who already say their mortgages are the biggest burden.

Don't be scared to talk about bankruptcy

Discussing finances can be comfortable, so no one really likes to talk about debt. Just mentioning the word bankruptcy might even feel taboo. Unfortunately, this perspective can make it even harder for someone to take necessary action when paying off debt becomes impossible. Understanding more about the process and the differences between Chapter 7 and Chapter 13 bankruptcy could help make it easier for anyone who is hesitant about taking this step.

Chapter 7 bankruptcy is considered a liquidation bankruptcy, which means that some of a person's assets will be sold to pay off as much debt as possible. The remaining debt is discharged after that, although there are exceptions. However, to even qualify for Chapter 7, an individual has to pass the means test. The means test measures whether a person's income is less than Connecticut's median income for the size of his or her household. If so, he or she passes.

Bankruptcy is more likely without financial literacy

Adults in Connecticut probably assume that they understand the basics of their finances. Many might even think they know quite a bit on the subject. Unfortunately, a lot of people understand far less about finances than they realize. A general lack of financial literacy is pushing people into difficult money situations where bankruptcy is frequently the best -- or only -- option.

Financial literacy is an important life skill, but only 57% of adults in America can pass even the most basic test on the subject. In fact, 13 other countries beat the United States when it comes to how many adults have financial literacy. Part of the problem is that most adults were never given the opportunity to learn about managing finances before being thrust into doing it all on their own. Attempts at learning later in life are not always effective either, especially since many wait until they are in difficult situations to do so.

High-income households not immune to bankruptcy

There are plenty of misconceptions when it comes to debt. One of those misconceptions is that Connecticut residents with higher incomes have enough disposable income to not even take on that much debt in the first place. And if they do bankruptcy is not an option because paying everything off must be fairly easy. However, income does not protect everyone from getting into this situation.

Regardless of income, a study from LendingTree found that most adults in America started out 2020 with financial stress. Although there are conflicting figures, that same LendingTree study showed that 60% of people with debt experience significant stress as a result. That financial stress can take many different forms. For example, Online Loans analyzed information from Federal Reserve Data and discovered that 10% of people who responded said they were losing their financial grounding.

Bankruptcy and millennials -- it's not just about student loans

For millennials, it might just feel as if there are opportunities for new credit cards around every corner. This is unfortunately not that far off from reality, so adults regularly use credit cards for making large and even everyday purchases. But credit card debt can spiral out of control much more quickly than most people realize. By the time someone realizes the situation has gotten out of control, bankruptcy could be the best option.

Credit card companies try to draw in millennials a couple different ways. One example is mailing out applications to Connecticut residents that do not exactly paint a full picture, like just how high interest rates get when introductory rates expire. Interest rates of as much as 25% are not that uncommon. Even when that information is out there, these companies often pile on incentives to encourage spending.

Personal bankruptcy effective for handling medical debt

There are a lot of things people can do to avoid taking on extra debt. Limiting shopping trips and using credit cards less often are just two examples. The problem is that there are so many things outside of the average person's control that can dig them deeper and deeper into debt. Anyone who has visited a doctor or hospital in Connecticut recently can probably understand why so many people pursue personal bankruptcy because of medical debt.

According to a 2019 study from the Consumer Bankruptcy Project, medical bills show up in 65.5% of bankruptcies every year. The problem itself is much bigger than half a million annual bankruptcy filings. One out of every six people in America has at least one delinquent medical bill, and all those past-due bills add up to $81 billion.

Is bankruptcy the solution for jumbo mortgages?

Owning a home is just one part of the American dream, but it often turns out to be more expensive than prospective homeowners in Connecticut expect. Finding a lender who is willing to offer fairly large mortgages might feel like the perfect solution to an expensive housing market. But securing a jumbo mortgage can actually cause more problems than it solves. As the past has already shown, jumbo mortgages play a surprisingly large role in bankruptcy filings.

When a property is too expensive for a typical home loan, a lender might offer a jumbo mortgage that ranges in value from the $400,000s to millions of dollars. Securing this type of mortgage is not that hard, either. Even though the last recession was not that long ago, one lender is offering $1 million mortgages to people with credit scores of 760 or higher. All they have to do is pull together a 10% downpayment. Borrowers who have credit scores of only 640 can get even larger mortgages through a different lender, often as much as $3 million.

Why would someone with a good credit score file for bankruptcy?

A person's credit score affects his or her ability to get a loan, obtain good interest rates and more. Not only do lenders view borrowers with good scores more favorably, they are also more likely to give those consumers access to more diverse credit offers. A record number of Americans now have good or excellent credit scores, so it might feel counterintuitive to think of this group being at risk for bankruptcy. That risk is unfortunately very real.

A good credit score is considered to be 700 or more, while an excellent score starts at 800. Nearly 60% of Americans have credit scores that fall into one of these ranges, a fairly significant improvement from just a decade ago. Since 2010, borrowers in Connecticut and across the country have been making increasingly fewer late payments. Delinquency rates also fell over that same period of time. Delinquencies and late payments negatively affect credit scores, so it is easy to see why scores have gone up.

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