Individuals, businesses, and even cities file for bankruptcy. Both wealthy and financially strapped Americans may need to file for bankruptcy due to a variety of circumstances. Even rich, powerful people take advantage of this opportunity for debt relief.
If you’re considering filing for bankruptcy, you may be wondering how common bankruptcy is and who typically uses it. In truth, bankruptcy affects everyone, both young and old, rich and poor. There is no single “type” of person who files for bankruptcy. The one thing that unites all filers is that they are seeking a fresh financial start. Let’s take a look at some numbers!
Bankruptcy Rates and Statistics
Bankruptcy has been a part of the American legal system since the early 1800s. In the past 25 years, the overall number of bankruptcies has skyrocketed. But the number of individuals filing for bankruptcy actually decreased from 2019 to 2020. Experts believe this is due in large part to government actions that helped homeowners affected by the coronavirus pandemic.
Consider these bankruptcy rates and statistics:
Chapter 7 bankruptcies accounted for 70.02% of total 2020 bankruptcy filings.
Chapter 13 bankruptcies accounted for 28.35% of total 2020 bankruptcy filings.
Chapter 11 bankruptcies accounted for 1.49% of total bankruptcy filings.
Other bankruptcies (Chapters 9, 12, and 15) accounted for .14% of total 2020 bankruptcy filings.
State by State Bankruptcy Statistics
It’s interesting to note the difference in the number of bankruptcies filed in different states. The following bankruptcy rates are for the time between July 1, 2020, and June 30, 2021.
States With the Most Bankruptcies
First Place: California with 46,488 filings
Second Place: Florida with 34,494 filings
Third Place: Illinois with 24,289 filings
Fourth Place: Ohio with 22,718 filings
Fifth Place: Georgia with 22,380 filings
States With the Fewest Bankruptcies
First Place: Alaska with 279 filings
Second Place: Vermont with 306 filings
Third Place: District of Columbia with 402 filings
Fourth Place: North Dakota with 566 filings
Fifth Place: Wyoming with 706 filings
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What Is Bankruptcy?
Bankruptcy is a legal process people and businesses can use to get relief from their debt. By filing the appropriate paperwork in a U.S. bankruptcy court, you’re often able to have most of your debts discharged. While businesses can also file for bankruptcy, personal bankruptcy allows individuals to address non-business-related debts. These are often consumer debts like credit card debt or medical bills.
Pros and Cons of Filing for Bankruptcy
Filing for bankruptcy has many upsides, but it’s important to look at the whole picture. That includes looking at the drawbacks.
Benefits of Filing for Bankruptcy
You can stop collections. Once you fall behind on paying your debts, you’ll start hearing from creditors and debt collectors. This can be very stressful. The day you file your case in bankruptcy court, most collections have to stop because of the automatic stay.
You get to keep many of your belongings. While some people think filing bankruptcy means you’ll lose everything, many exemptions help protect your property. You’ll be allowed to keep the majority of your belongings, such as your household goods and your car.
You get to discharge your debts. One of the biggest benefits of filing for bankruptcy is that most of your debts will be discharged or erased for good, including credit card debt.
Drawbacks of Filing for Bankruptcy
It stays on your credit history for up to 10 years. Chapter 7 bankruptcy stays on your credit history for 10 years, and Chapter 13 stays on your history for seven years. Filing bankruptcy will also hurt your credit score, but only in the short term. Many filers find they have a higher score a year or two after their filing than they did before they filed.
You’ll probably lose your credit cards. Most credit card companies will cancel your credit cards when you file bankruptcy, even if you had a zero balance when you filed your case. You’ll get quite a few credit card offers after filing your case, but most of them will have a very high interest rate.
It may be more difficult to get a mortgage in the short run. If you try to buy a home following bankruptcy, you may find it difficult to obtain a mortgage right away.
Types of Bankruptcy
While the Bankruptcy Code has six different chapters, only three are available for individuals (and married couples) seeking protection from the U.S. bankruptcy court. These are Chapter 7, Chapter 11, and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows a debtor to discharge, or get rid of, their debts. This includes medical debt and credit card debt. There are limits to how much you can earn and still qualify to file Chapter 7. This is a major difference between Chapter 7 and Chapter 13. Even if you qualify to file a Chapter 7 bankruptcy, you’ll want to consider the pros and cons before filing.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is usually filed by businesses, not by individuals or couples. You’ve probably read news stories about companies from Toys R Us to General Motors that have filed a Chapter 11 bankruptcy case. This makes it significantly different from Chapter 7, which is used by individuals. In some cases, people with a high net worth will choose to file a Chapter 11 bankruptcy as well. Chapter 11 allows filers to either liquidate their assets or restructure their debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, unlike Chapter 11, may only be utilized by individuals or married couples. Instead of discharging your debts outright, as happens in Chapter 7, Chapter 13 reorganizes your debt and establishes a 3-5 year repayment plan. The debtor must send their monthly payments to the trustee handling their case. After the repayment period is over, the remaining debts are discharged. You may choose to file Chapter 13 if your income is too high to qualify for Chapter 7 or if you want to keep your home.
What Causes Bankruptcy?
Many people believe that only financially irresponsible people and companies file for bankruptcy. This is simply not true. Only 5% of bankruptcies that are filed in the United States are due to reckless spending. More common reasons for bankruptcy include:
Medical Bills: Accidents, illnesses, and injuries seem to occur when we least expect them, and all three can cause medical bills to pile up. By some estimates, medical expenses are responsible for as much as 60% of bankruptcy filings.
Foreclosure: Home foreclosures are a leading cause of bankruptcy. One of the main causes of the housing market crash in 2008 was borrowers being sold on the benefits of using adjustable-rate mortgages (ARMs) to purchase a home. These ARMs kept the house payment low enough initially, but when the rate eventually increased, many borrowers found themselves unable to make their payments.
An Unexpected Emergency: Unexpected emergencies, such as a car breaking down or a heat pump breaking, can place enough strain on an already tight budget to cause people to sink deeper into debt.
Unemployment: Job loss is often unexpected and most people don’t have enough savings to pay their bills for long without an income. Debt can pile up quickly without a steady income to pay the bills.
Divorce: Divorcing a spouse often causes significant trauma and financial problems. Splitting one household into two often increases monthly costs for each party on everything from housing to food. This, along with the costs associated with hiring an attorney to represent you throughout the divorce proceedings, can lead to you to file bankruptcy.
Are People From Some Demographics More Likely To Experience Bankruptcy Than Others?
Bankruptcy is available to everyone, regardless of race, age, or marital status. And many different types of people use this legal tool to get debt relief. Even so, people from certain demographics are more likely to go through the bankruptcy process. According to Debt.org, typical filers earn less than $30,000 a year and are:
Between 38-45 years old
Male (although the gap between the number of male and female filers is small)
At least high school educated; some have attended college as well
Industries With the Most Bankruptcy Filing Because of the COVID-19 Pandemic
The American economy as a whole was blindsided by the COVID-19 pandemic. Many stores and businesses experienced substantial losses, which caused them to file bankruptcy. According to a February 2021 article in The Washington Post, the industries that filed the most bankruptcies due to the pandemic are:
Entertainment Companies: It should come as no surprise that the number of bankruptcies in the entertainment industry increased from 132 in 2019 to 524 in 2020. Movie theaters weren’t able to stay profitable as lockdowns prevented them from opening their doors.
Restaurants: The number of restaurants filing for bankruptcy increased from 400 in 2019 to 660 in 2020. The restaurant sector was hard-hit throughout the pandemic, and many restaurant owners viewed bankruptcy as their only chance to stay in business.
Retail: A lack of business and a rapid decrease in the value of retail properties caused the retail industry to see a significant increase in bankruptcies, from 284 in 2019 to 440 in 2020.
Real Estate: The value of many commercial real estate properties decreased as more and more employees began to work from home. Filings in the real estate industry rose from 605 in 2019 to 985 in 2020.
Energy: The coronavirus caused filings in the oil and gas sector to increase from 236 in 2019 to 785 in 2020.
Bankruptcy has gotten a bad rap over the years. In reality, it’s a legal way to discharge and restructure debt that many people, including the rich and famous, have used. There’s no shame in needing help from time to time or in seeking that help through bankruptcy. Here are some famous bankruptcies from the past few decades:
Donald Trump’s Companies ... Love him or hate him, Donald Trump has made a lot of money over the years through multiple business ventures. Companies Trump owns have filed for bankruptcy a total of six times, and Trump defends these filings as a normal part of conducting business.
The six bankruptcy filings were: the Trump Taj Mahal in 1991; Trump Castle Associates, Trump Plaza Casino, and Trump Plaza Hotel in 1992; Trump Hotel & Casino Resorts in 2004; and Trump Entertainment Resorts in 2009. All of these filings were Chapter 11 bankruptcies. Although they’re often attributed to Trump personally, the bankruptcy filings weren’t personal bankruptcies but rather corporate ones.
Dave Ramsey is a household name for many families due to his widely marketed plans to help people find financial freedom. What many do not know is that Ramsey filed for bankruptcy in 1988. Since then, he has accumulated vast wealth.
Walt Disney is often viewed as the ultimate American success story. He managed to start an entertainment company that became an international icon. But his first cartoon business, Laugh-O-Gram Studios, declared bankruptcy a few short years after its founding in 1920.
Abraham Lincoln wasn’t always involved in politics. Before he served as the 16th president, he was a shopkeeper in 1832. His business failed, and he became liable for debt which took him years to repay. Unfortunately for Lincoln, the bankruptcy laws at that time did not allow him to discharge the debt.
Milton Hershey’s name is now synonymous with chocolate, but Hershey’s story wasn’t always a storybook. His first confectionary business failed, and Hershey filed bankruptcy in 1882.
Mike Tyson, the heavyweight boxing champ, filed for bankruptcy in 2003 after accumulating over $300 million in his career. He has since been able to get back on his feet financially.
Merle Haggard had a lot of success in the music industry and is considered a country music legend. Nevertheless, he filed for bankruptcy in 1993.
There are a lot of misconceptions about bankruptcy. Filing for bankruptcy has its pros and cons. It certainly requires careful consideration and shouldn’t be taken lightly. But it’s a useful legal tool that many individuals and companies have used to get a much-needed new financial beginning.
If you’re trying to deal with overwhelming debt and want to pursue financial freedom through bankruptcy, Upsolve may be able to help. If you can’t afford to hire a lawyer, you may be able to use Upsolve’s free web app to prepare your Chapter 7 bankruptcy forms. If your case is complicated or you want professional legal advice, we can help you find an experienced bankruptcy attorney to work with as well.