A perfect indicator of the state of the U.S. economy is the escalating number of bankruptcy filings. Many people overwhelmed with consumer debt and maxed-out credit cards are filing for bankruptcy at alarming rate. Experts believe the trend is only going to get worse.

Bankruptcy. For many, it's an unthinkable fate, one that's impossible in a land that rewards people for perseverance and hard work. Yet after a few decades of addiction to credit cards and rising consumer debt, America is finding the number of bankruptcies on the rise. If the economy continues to worsen, more people will begrudgingly become familiar with the current bankruptcy law, and take part of a sad but growing trend.

Bankruptcy on the rise


For a snapshot of how sharply bankruptcies have risen, take a look at Minnesota. It's been reported that nearly 13,800 people filed for Chapter 7 personal bankruptcy in 2008, which is nearly a 50 percent increase over the previous year. Business bankruptcies exceeded that figure, ticking in at around 66 percent. To make matters worse, the number grew sharply in December, with personal bankruptcies rising nearly 75 percent higher than the previous year. It was worse for businesses, which accounted for nearly half of the December overall filings.

Experts believe that this doesn't bode well for the future. Lenders typically like to wait out the month of December before calling in their overdue loans. Most try to let their borrowers make it through the holiday season, hoping they'll be able to recoup enough cash to make good on their loans. This year, however, no such leniency appears to have been given, and bankruptcies have spiked.

Bankruptcy Law 101


With this trend continuing, it's wise to gain a general understanding of bankruptcy law. There are two types of personal bankruptcy-Chapter 7 and Chapter 13.

Chapter 7 wipes out an unsecured debt, such as credit card or medical bills. It won't eliminate any fixed debts, which include child support, mortgages, and student loans. Chapter 13 bankruptcy is for filers who believe that they can repay their creditors in three to five years. Chapter 13 also puts a cap on the amount of debt you can carry when you're filing, a ceiling designed to keep wealthy individuals from taking advantage of the law.

Either type of bankruptcy requires a means test, which will determine your eligibility. You'll also need to enlist the help of a bankruptcy attorney, who will charge you a hefty fee. Most lawyers get somewhere between $1,000 to $3,000 for a filing. There are also court filing fees, required credit counseling, and a budgeting class. It can be an expensive process, particularly ironic in light of the fact that you're broke.

Becoming familiar with bankruptcy laws has become an increasingly commonplace pastime for Americans. The staggering numbers of filings over the past year are an indictor that we're in the midst of tough times. The big question in 2009 and beyond is how long will this trend last.

Published on February 20, 2009