Going Bankrupt: The New American Financial Epidemic

Today, American citizens and corporations are going bankrupt at unprecedented rates. Statistics show baby boomers are forced into bankruptcy more than any other group. According to a study conducted by the American Bankruptcy Institute, bankruptcy filings for individuals over age 45 have risen nearly 30-percent over the past decade.

Since 2007, the percentage of Americans going bankrupt has risen nearly 70-percent. Nearly 1.5 million bankruptcies were filed in 2008. Estimates show nearly 4.5 million people will file personal bankruptcy by the end of 2009.

Financial experts blame the mortgage crisis for the explosive increase of personal bankruptcies. Borrowers who entered into subprime and adjustable-rate home loans can no longer afford their mortgage payments.

The rapid decline in property values and instability of mortgage lenders has nearly eradicated the opportunity for borrowers to refinance mortgage notes. When borrowers cannot meet mortgage obligations or obtain refinancing they are forced into going bankrupt in an effort to avoid foreclosure

The failure of mortgage lending institutions and Wall Street escalated consumer panic. Multi-billion dollar corporations and independent business owners were forced to either close their doors or enter into bankruptcy. Skyrocketing unemployment, loss of healthcare insurance and credit card company crackdowns created financial ruin not witnessed since the Great Depression.

Unemployed homeowners and those with subprime home loans with balloon payments were unable to refinance or obtain a second mortgage. Their only option was to file for bankruptcy protection. This opened a new can of worms; partly caused by the new bankruptcy laws enacted in 2005.

The Bankruptcy Abuse and Consumer Protection Act was created as an attempt to curtail consumers from going bankrupt to erase credit card and unsecured loan debts. Prior to BAPCPA many consumers filed bankruptcy under Chapter 7. Referred to as 'liquidation bankruptcy', Chapter 7 allowed consumers to liquidate assets to repay outstanding debts. Outstanding balances were written off and consumers obtained a clean financial slate.

Today, BAPCPA requires debtors to undergo credit counseling through an approved U.S. Trustee Program agency. Additionally, debtors are required to repay a portion of debts through the development of a Chapter 13 repayment plan. The amount of debt to be repaid is determined through the means test; a financial tool that compares debtors income to their states' median income level.

When debtors' income falls below median income levels they might be allowed to file for Chapter 7. Otherwise, they must file for Chapter 13 protection and adhere to established chapter 13 payments which typically last between three and five years.

During Chapter 13 bankruptcy, debtors' must contribute a large portion of disposable income toward repayment of debts. They are not allowed to incur any new debts without permission from the court. Chapter 13 payments are paid to the bankruptcy Trustee, who in turn distributes installments to creditors.

If debtors are unable to adhere to the repayment plan, creditors can petition the court and request dismissal of the bankruptcy. If this occurs, debtors fail out of bankruptcy and lose all protection of the court. Creditors can commence with collection action including foreclosure.

Going bankrupt is never a joyful experience. It is stressful and emotionally draining. However, it is important to keep a positive outlook and become educated about money management techniques to prevent financial catastrophes from occurring in the future.

Going bankrupt is never a happy event. It can be stressful and emotionally draining. However, it is important to realize there is life after bankruptcy. It is also important to retain a positive outlook and search for options and solutions to overcome future financial hardships.