Understanding The Bankruptcy Feedback Loop

A recent piece published in The Atlantic describes a phenomenon it dubs “the bankruptcy feedback loop.” This is the cycle of impoverished individuals filing for bankruptcy to eliminate their debts only to find themselves back in debt not long after, considering filing for bankruptcy again. For many of these individuals, debt is a generational problem and the goal of being comfortable financially appears to be too far away to actually achieve.

The piece illustrated the story of one Memphis woman who filed for Chapter 13 after one of her creditors won a judgment against her and wage garnishment was set to begin. The piece reported that Memphis is the bankruptcy capital of the United States and that black filers, who comprise most of the bankruptcy filers in Memphis, are less likely to achieve debt relief through bankruptcy than white filers. In 2015, half of the black individuals who filed for Chapter 13 in the United States Bankruptcy Court for the Western District of Tennessee had filed for Chapter 13 at least once more in the previous five years. Although Chapter 13 is an attractive option for many because it often does not require the filer to put down any money up front, it is often more expensive than filing for Chapter 7 in the long run.

Chapters 7 and 13 are More than Just a Different Set of Requirements

Some individuals are only eligible to file for Chapter 13 bankruptcy because they do not pass the Chapter 7 means test. Others have the option to choose one or the other. There are benefits and drawbacks to both bankruptcy chapters.

Many view Chapter 13 as the “better” bankruptcy option because it gives the filer more control over their case’s progress. With this control comes the responsibility to comply with a debt repayment plan. This is where many filers fail. According to the Atlantic piece, half of the black debtors who file for Chapter 13 nationally see their cases dismissed without any debt relief. It also reported that most of the individuals in Memphis who file for Chapter 13 are unable to keep up with their cases’ requirements for even a year.

With Chapter 13, the filer’s debt is discharged after he or she completes the repayment period. For many individuals, the imposed repayment terms are unrealistic for them to complete with their income levels. These individuals could be well served by Chapter 7 bankruptcy, which discharges debt quickly but carries the penalties of asset liquidation, the bankruptcy remaining on the filer’s credit report for 10 years, and the inability to file for Chapter 7 again for eight years after filing the first.

Work with an Experienced Buffalo Grove Bankruptcy Attorney

If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, it is important that you speak with an experienced bankruptcy attorney about your plan to ensure that you are making the most productive choices for your case. Contact our team at Newland & Newland, LLP to schedule your initial consultation in our office. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.

(image courtesy of Khara Woods)

  • Newland & Newland LLP, Attorneys, Arlington Heights, IL
  • Lawyer.com