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Redwood City California Bankruptcy Law Blog

Majority of bankruptcy filers struggled to pay debts for years

When debtors in California choose to approach a bankruptcy court, most of them have likely gone through a prolonged period of financial hardship. A report from the Notre Dame Law Review called this period of stress and deprivation "the sweatbox." Drawing upon long-term data from the Consumer Bankruptcy Project, the report identified a category of bankruptcy filers known as long strugglers. Between 2013 and 2016, 66 percent of the debtors surveyed by the organization struggled to repay debts for two years or more even when it meant forgoing food or medical care.

Almost one-third of these debtors grappled unsuccessfully with debts for five or more years. The number of people in this category more than doubled compared to bankruptcy filers in 2007.

Credit mistakes can linger for up to a decade

California residents and others who have poor marks on their credit reports may panic at the sight of them. However, it is important to know that they will almost all go away after seven years. The only exception is a Chapter 7 bankruptcy that falls off a credit report after a decade. If a person does file for bankruptcy, the impact is usually greatest for the first two years after filing before leveling off and declining afterward.

Late payments can be among the costliest mistakes a person can make for his or her credit score. The late payment remains on that person's credit score for up to seven years, and payment history makes up 35 percent of a FICO score. However, it is still worthwhile to make that payment as soon as possible because letting it linger could result in an account being sold to a collection agency.

Waiting to file for bankruptcy could worsen financial hardship

Many factors, from medical emergencies to job loss, could cause people in California to go into debt and fall behind on paying bills. Although many debtors struggle onward with the intention of catching up on their payments, they might benefit more from a bankruptcy filing, especially if their financial situations have little prospect of improving. Filing for bankruptcy could let people temporarily forgo payments on credit cards and medical bills so that they can purchase groceries and gas while the court addresses their cases.

The early recognition of an inability to pay debts could spare someone substantial stress when they seek bankruptcy protection. Once a court begins to process the case, it issues an automatic stay. This is a court order that prevents creditors from making efforts to collect debts. The stay might halt harassment and allow a person to focus on rebuilding a financial life.

Are debt collectors harassing you?

Falling behind on your bills is stressful enough, but when debt collectors start aggressively contacting you, it can be a nightmare. Like many in this situation, you may reach the point where you are afraid to answer your phone, reluctant to leave the house and worried that others will find out how bad your situation has become.

While such concerns are understandable, it may comfort you to know that there are limitations to the methods creditors can use and the steps they can take while attempting collect a debt. Knowing those limitations may help you recognize when a debt collector has gone too far.

Bankruptcy often a viable tool for dealing with medical debts

People in California naturally think about their health when confronted with a cancer diagnosis, but a medical crisis could also trigger financial problems. Ongoing medical bills sometimes coupled with an inability to work could quickly deplete a person's resources. A 2013 study prepared by the Fred Hutchinson Cancer Research Center reported that people with cancer faced a 2.5 greater chance of filing for bankruptcy compared to people without serious medical problems.

Either Chapter 7 or Chapter 13 bankruptcy could help a person recover financially from high medical debts. Under Chapter 7, a debtor might need to sell some assets to repay debts, but after a certain point, a court will discharge remaining balances. A Chapter 13 bankruptcy will protect some assets but requires a payment plan of three to five years before any remaining balances might be discharged. Both approaches exempt the liquidation of certain assets, like retirement accounts.

Young people struggling with credit card and student loan debt

According to a survey by Charles Schwab, members of Generation Z in California and elsewhere around the country owe lenders an average of $4,343. That amount increases to $11,663 for those who are between the ages of 21 and 25. In addition to being in debt, roughly half of those who were surveyed had less than $250 in savings. Individuals who are between the ages of 16 and 25 are generally gaining the ability to make financial and other types of decisions for themselves. Therefore, it is important that they understand how to manage their debt.

As a general rule, student loans and mortgages are seen as good debts. This is because they tend to be less expensive and may offer tax advantages. Credit card debt is regarded as something that a person doesn't want to have. The major drawback is the high interest rates that credit card companies charge. However, those who took part in the survey seemed to have the opposite opinion about these types of debts.

Older Americans filing for bankruptcy at higher rates

A study from the Consumer Bankruptcy Project has found that California residents and other Americans who are 65 and older filed for bankruptcy at a higher rate in 2016 compared to 1991. The rate was more than 200 percent higher for people between the ages of 65 and 74 and more than triple for individuals 75 and older. This is partially because there are more Americans in this age range today compared to past decades.

The study found that by 2050, there will be 88 million Americans who will be age 65 or older. Its authors contend that the bankruptcy system could be overwhelmed by retirees filing if recent trends continue. However, it is worth noting that older Americans are filing for bankruptcy at a rate lower than other age groups. Of those who filed between 2013 and 2016, only 3.3 percent were over the age of 75.

Common financial mistakes and possible solutions

Even if you're someone who loves all things financial and have always kept careful track of your own spending habits, have organized, updated financial records and simply love to create budgets and put them into action, the cost of living in various California regions is so high that even those who earn high incomes and typically keep their finances in check can run into serious trouble. You may, in fact, be surprised to learn how quickly your financial train can be thrown off track. 

If you find yourself in the midst of financial crisis and things get out of hand, it's critical to know what types of options are available to restore financial stability. Since most finance problems are temporary, you'll want to know how to get back on path and lay the groundwork for a stronger financial future. Understanding the issues that often spark financial trouble can help you avoid similar problems down the line.  

Key mistakes to avoid when in debt

Some California residents who are in debt make mistakes that cause their financial situations to go from bad to worse. For instance, an individual may spend money on food or other nonessential items to forget about their plight. However, it is important that an individual starts on a path to getting out of debt immediately. This means not spending money on frivolous items.

By getting out of debt in a timely manner, long-term effects can be minimized. When attempting to pay down debt, don't make it harder by taking short-term loans from a bank or payday lender. These typically come with high interest rates and other fees. A payday loan can come with an APR of 400 percent while checks sent by lenders can have interest rates as high as 36 percent.

Securing business financing after a bankruptcy

Some Californians who own businesses might worry that their prior bankruptcy cases may keep them from being able to get approved for business loans. While it might be more difficult to qualify after bankruptcy, it is possible for business owners to find loans that they might be able to obtain.

Some lenders are more concerned about whether the bankruptcy case is over. If a case is closed, an owner may be able to secure a business loan. If the bankruptcy case is still open, it may be more difficult to secure financing.