Many Americans are struggling financially, despite what their social media highlights show. According to the most recent federal statistics, bankruptcy filing surged by a total of 16.2% between September 2023 and September 2024, reflecting rising costs, mountain debt, and unexpected emergencies that have left households teetering on the financial brink.
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With bankruptcy filings up from last year, GOBankingRates broke down various factors contributing to this surge. Read on to see if you’re at risk of filing.
Understanding the Surge
Researchers at the Administrative Office of the U.S. Courts found that annual bankruptcy filings totaled 504,112 last year, compared with 433,658 cases in 2023.
Of those, business filings rose by 33.5%, while personal (non-business) filings were 15.5%. While total bankruptcy filings have increased each quarter since June 2022, they remain far lower than the historical high in 2010 of 1.6 million.
“Key drivers include the continued impact of elevated interest rates, and inflation that significantly contribute to rising household debt,” said Scott Barna, president at Stretto, a bankruptcy services and technology firm.
“This elevated debt, coupled with the fact that many consumers have exhausted the COVID monies that the federal government had distributed, has contributed to the incremental rise in defaults and bankruptcies.”
Joe Camberato, CEO of National Business Capital, said many businesses filed for bankruptcy because government money offered during the pandemic ran out and private equity funding is harder to get.
“A lot of companies were burning through cash without actually being profitable, thinking they could always raise more money,” Camberato said. “But now, that’s not an option. If you weren’t running a solid, sustainable business, you’re in trouble.”
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Common Triggers
Inflation peaked at 8% in 2021, making the cost of everyday items seem out of reach for most consumers.
“A lot of people who had a delicate balance in their finances found that they couldn’t keep up with inflation, and their debt soared,” said Melanie Musson, a finance writer at Clearsurance, an online insurance shopping platform.
In addition, Musson said rising interest rates also contributed to increased bankruptcy filings.
“People file bankruptcy when they can’t repay their debts,” Musson said. “Any variable-rate debt has had extremely high interest rates over the past several years, making debt repayment even more difficult than usual. Even fixed-rate debt that was taken on in the past few years is higher than it had been.”
An unexpected crisis or life event, such as a job loss, divorce or medical crisis, can also trigger bankruptcy.
“These unplanned events may cause unmanageable financial hardship, especially for individuals who do not have significant savings,” Barna said. “For these individuals, a financial emergency overlaid on top of a precarious day-to-day economic situation can drive them into bankruptcy.”
Signs You May Be at Risk
Consumers could be at risk of filing bankruptcy if their debt-to-income ratio is 43% or higher.
Struggling to pay bills and using credit or alternative finance programs such as buy now, pay later (BNPL), and paycheck advance services to bridge the gap could make things worse.
“These programs help people be able to pay for things, on credit, easier,” said Ashley Morgan, a bankruptcy and debt attorney. “But they open up a cycle of living on credit.”
Morgan said BNPL programs are often used for multiple purchases, which increases the amount of consumer debt. The cost of paying for multiple purchases using BNPL could be more expensive than buying one item at the original price.
Borrowing money upfront from a paycheck advance program also results in borrowing money again during the next pay cycle to get by.
“The fees on these programs are often offered at a high percentage and can cost more than the interest on credit cards,” Morgan said.
Smart Money Moves
Paying off expensive debt like high car payments can also help. Many consumers are paying between $500 and $750 in car payments, with some individuals paying over $1,000 a month, Morgan said.
“Car loan payments are on the rise and for longer periods of time,” Morgan said. “We’re seeing 72-month and 84-month car loans, when 48 to 60 months used to be common. Besides housing, a car loan tends to be an individual’s highest monthly expense.”
In addition, Barna recommended smart debt management strategies, including lowering interest rate payments and maintaining a six-month savings cushion to avoid bankruptcy.
“In short, the best recommendation is the simplest: Live within your means,” Barna said.
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This article originally appeared on GOBankingRates.com: Bankruptcy Filings Jumped in 2024: Are You at Risk of Filing?
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