In 2022, Chapter 13 bankruptcy filings increased by 26.6% while business and other personal bankruptcy filings fell by 11.7%.
Chapter 13 bankruptcy was established to provide debt relief to individuals who are struggling financially by giving them the grace to pay off their debts without the worry of losing their assets to creditors.
In this article, we will discuss what is Chapter 13 bankruptcy and how it works as well as why there was an increase in Chapter 13 bankruptcy filings in 2022.
What is Chapter 13 Bankruptcy and How Does it Work?
Chapter 13 bankruptcy is a legal process that provides relief to persons who are unable to repay their debts. It is the second most common type of personal bankruptcy filing where debtors commit to a three-to-five-year payment plan, and upon completion of the plan, their remaining debts are discharged.
Declaring bankruptcy automatically triggers the system which prevents creditors from collecting assets from individuals. This is in an effort to allow persons an opportunity to repay debts and create a plan to manage their financial difficulties.
With Chapter 13 bankruptcy, debtors are allowed to consolidate their debts and prevent the foreclosure of homes due to bankruptcy. An individual’s credit score will be affected by a Chapter 13 bankruptcy filing and it will remain on the credit report for seven years. However, it is possible to rebuild your credit score during this time as long as payments are made on time since these payments also contribute to an individual's credit report.
What Caused the 2022 Increase in Chapter 13 Bankruptcy Filings
During the pandemic, many individuals received governmental assistance in the form of rental assistance, unemployment compensation, stimulus checks, frozen student loan payments, etc., as a result, individuals have been better equipped to manage their debts and expenses. This led to a decrease in the number of bankruptcy filings during the pandemic.
However, as of 2022, Chapter 13 bankruptcy filings have increased by 26.6%. The rising interest rates, worker shortages, supply chain issues, and increased cost of living due to inflation have left families and businesses in the US with several economic challenges.
For an individual who is struggling during the post-pandemic season, bankruptcy provides an avenue to renegotiate debts as the country experiences an economic downturn. Typically, an individual would file for bankruptcy in the event of a situation that would cause significant financial strain such as divorce, unemployment, or the loss of a family member. Given the financial constraints associated with the pandemic, several individuals are facing financial crises.
Although bankruptcy filings have increased, they remain below the pre-pandemic levels several individuals are choosing bankruptcy to alleviate the burden of their debts.
