Bankruptcy Trends and the New Shadow Economy

Personal bankruptcy filings in the US continue to rise in 2010.  Some experts believe we are on pace to exceed 1.7 million filings by year’s end, which is close to the all time record of about two million filings in 2005 before the Bankruptcy Reform Act took effect.  The revisions to the code were intended to curb the number of filings by making the bankruptcy process more restrictive, burdensome and expensive.  At the time, powerful bank and credit card lobbies persuaded Congress to pass the changes to reduce so-called abusive filings.  Few bankruptcy attorneys and judges thought the reforms were a good idea, and now in the wake of the lingering recession and housing crisis, it seems more clear than ever the changes were “bad medicine.”

But the bankruptcy filing statistics only hint at the real depth of the problem.  Perhaps even more troubling is the growing emergence of a group of Americans who are in serious financial distress but can’t be helped by filing for bankruptcy.  This group of debtors are forced into what is known as the “shadow economy” or informal bankruptcy.  It is common now for young adults facing crushing student loan debt and a hostile, shrinking job market.  Under current bankruptcy law, student loans are very rarely discharged.

Another situation where individuals facing financial hardship fail to file for bankruptcy involves homeowners trying to hang onto their homes in the face of lower wages, declining market values and higher monthly mortgage payments.  Chapter Seven is simply not very helpful in this circumstance.  Chapter Thirteen can help homeowners catch up on mortgage arrears but does not offer a complete solution to the problem.  A complete solution would entail granting bankruptcy judges the power to modify the mortgage principle.  However, recent reform efforts in this direction have failed, even though these changes have the potential to avert the tidal wave of foreclosures that have rocked the financial sector over the past three years.

For further reading on this topic, see this recent article from USA Today, “Only a fraction of those in need file for bankruptcy.

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— Michael   

6 Replies to “Bankruptcy Trends and the New Shadow Economy”

  1. The economic crisis raises problems in every country. Just now I heard in my country TVA raised to 25%. Let’s hope things will become better!

  2. Great facts. I totally agree with you since we are seeing young adults filing bankruptcy for many reasons. A million thanks for this great information and for sure this is a big help for people who were on the same situation.

    Great job and I will give you a two thumbs for this post.

  3. Filing for bankruptcy at the right time can lessen the individual’s financial burden and ultimately resolve issues in the end. Being said, I thank you for this great write up. The financial crisis had been taking its toll globally and we need all the help we can get. Thank you!

  4. The rapid increase of bankruptcy filings is really disturbing and could be a foreshadow of things to come in the future. This financial slump have had to end soon.

    People as of now should make do of what they have and maby good money management would play a great factor on saving ones homes and businesses. Thank you for this write up and for the stats as well.

  5. 2 thumbs up for this post! Kudos to you for coming up with this article and the link for the USA Today post on bankruptcy. Economic crisis or not we should really are of things like this. Its great to know that there are a lot of people like you who would take time to post helpful articles in the net.

    Thanks and God bless you.

  6. @Jim – Ditto. I agree with, sound money management will lay a huge factor in this. News of steady growth of the number of foreclosure is very frightening. A lot of people buried and deep financial crisis and bad credit is common knowledge. I wish some would actually had the knowledge of when to use Chapter 13 and file it in time to save there finances.

    Well, this article may be of great help. Wish everybody reads it.

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