Does bankruptcy hurt the economy or help it?

With the economic downturn happening now in 2020, it makes sense to be asking how your bankruptcy could negatively affect the economy. You may worry that not paying your bills is harming another business or individual or could cause a kind of chain reaction.

The good news is that consumer bankruptcy doesn’t usually have negative effects on the economy unless your bankruptcy is one happening en masse with other consumers. The reason that bankruptcies are worse when they happen all at the same time is because bankruptcies reduce spending confidence. The businesses then suffer losses from fewer people buying as well as from those who have used credit and can no longer pay.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted and made it more difficult for people to qualify for Chapter 7 bankruptcies. Instead, many people qualify for Chapter 13 bankruptcy, which requires at least some portion of the debt to be repaid over a period of three to five years.

By 2009, it was shown that not being able to discharge debts may have had negative consequences and made the recession during the early 2000’s worse because consumers were stuck with large monthly payments instead of being able to return to normal earning and spending.

Today, you can qualify for Chapter 7 or 13 bankruptcy, depending on how much you earn and what you owe. Chapter 7 bankruptcy is likely to give you the most debt relief, but other forms can still be beneficial. Don’t let concerns about the economy stop you from filing. Being able to return to normal spending helps the economy in the long-term, so a bankruptcy in the short-term is more likely to have a positive outcome for you and those around you.

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