Personal Finance 

Bankruptcy can set you back for 26 years

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Bankruptcy can present long-term roadblocks to financial securityMost people aren’t surprised to discover that personal bankruptcy can set you back by quite a lot financially. After all, you have to be in a pretty poor financial position to file for bankruptcy in the first place. But the effects of bankruptcy on your financial situation might be greater than you imagine.

According to a study from Ohio State University and University of Maine researchers, it can take 26 years for bankruptcy filers to catch up to their nonbankruptcy-filing peers in terms of net worth.

How bankruptcy affects your ability to “catch up”

The study used data from the National Longitudinal Survey of Youth, which has been gathering information from randomly selected Americans in the same group since 1979. In this case, the researchers compared respondents with similar economic and social backgrounds. They considered those who had filed for bankruptcy with those who hadn’t, and made determinations about how far behind filers end up.

Here are some of the interesting findings from the study:

  • It takes 12 years for filers to catch up in terms of savings.
  • It takes 14 years for filers to catch up in terms of total income, as well as in home ownership.
  • 46 percent of those who filed bankruptcy have car debt 15 years later, while 52 percent have car debt just after bankruptcy. However, even as bankruptcy-filer car debt declines over a period of years, it never gets to the point where it reaches the 42 percent of those with car debt among those who have never filed for bankruptcy.
  • Homeownership among those who have never filed for bankruptcy is 73 percent, while 68 percent of those who filed have a home 15 years after bankruptcy.
  • Those who file for bankruptcy are likely to be less educated, live in urban areas, be divorced, female and have bigger families as compared to their peers who never filed.
  • After 15 years, bankruptcy filers are on par with non-filers in terms of many of them (68 percent) have credit cards.

One of the most interesting findings from the study is the fact that car ownership wasn’t that impacted by bankruptcy. Indeed, 90 percent of those who file for bankruptcy have a car less than a year after the process. Most of these car owners have auto debt, though. But it seems as though bankruptcy is no bar to getting a car loan a year after filing.

Also interesting is the fact that 74 percent of those filing bankruptcy have a job after one to five years, while that number is 73 percent for non-filers. Perhaps someone filing for bankruptcy is more interested in re-establishing him- or herself, and is more likely to take any available job in order to “fix” the situation.

The type of bankruptcy protection sought also seems to matter. Those asking for Chapter 7 protection, which allows you to discharge most of your debts (after your assets are sold to pay off as much of your debt as possible) take longer to recover from bankruptcy than those filing Chapter 13, in which a filer creates a payment plan and discharges the debt that way.

While bankruptcy is the only way some will ever get out from under huge debt loads, it’s also important for them to understand the gravity of the situation. How long do you think it would take you to catch up after a bankruptcy?

(Photo: Ada Gonzalez)

{ 6 comments, please add your thoughts now! }

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6 Responses to “Bankruptcy can set you back for 26 years”

  1. dojo says:

    I hope I’ll never be in this position in my life. It’s indeed a ‘rock bottom’ situation for the people who go through and they should learn from this. some of them are going into another bankruptcy afterward, which to be is shocking.

  2. Abigail says:

    Hmmm, interesting numbers. I guess most of us just think about the 7-year thing. To me, though, bankruptcy kind of ruins your life forever.

    It makes it significantly harder to get loans — I shudder to think what interest rates those year-after-bankruptcy folks are getting — and harder to secure housing.

    I worked at a larger apartment complex for awhile. They didn’t really care how long in the past the bankruptcy was, they really didn’t want the person. So I can’t imagine how bad it is to try and get a mortgage.

    Obviously, a lot of people have no choice but to declare bankruptcy. Still, I think a lot of people underestimate that it will affect you for so long.

  3. uclalien says:

    My parents fell into the exact opposite situation. Bankruptcy freed them to be successful.

    Let me set the stage. The IRS was going after my parents for $3,000 that they evidently owed. Now, that might not sound like a lot, but here’s the catch. The IRS wanted more than $30,000. For years, my parents told the IRS that they could scrape together the original $3,000 (probably through borrowing from family), but the IRS turned down every offer. Ultimately, they had to file bankruptcy to get the IRS off their back.

    Within five years of filing bankruptcy, my parents purchased a house, started a business, and began working on their savings. None of this was possible prior to the bankruptcy because the IRS would grab whatever they could if my parents opened a bank account. Today (less than 15 years after the bankruptcy), my parents own two successful businesses, have nearly paid off their mortgage, and have a solid savings.

    So it’s definitely not a case of one size fits all.

  4. uclalien says:

    These “catch up” numbers are deceptive.

    For the most part, people don’t take filing for bankruptcy lightly. Had they not filed for bankruptcy, they would have likely continued their downward spiral and been in much more dire straits.

    So comparing a person’s post-bankruptcy situation to that of their peers’ (who were generally already well ahead of them financially pre-bankruptcy) is a pointless measure. The fact they remain behind their peers post-bankruptcy should be expected. But that doesn’t mean that they aren’t better off than they would have otherwise been.

  5. adam carolla fan says:

    dont crap out kids you cant afford. thats one way to stave off bankruptcy.

    -a. carolla

  6. Ralph Ruiz says:

    I agree with Uclalien above. The mindset of the individual filing is as important as filing itself. Sometimes a situation presents itself that leaves you no option(financially speaking) but to file. Then sometimes the situation is the result of poor money habits, repeated over and over again. Regrettably, bankruptcy doesn’t help this group. It just gives them a fresh start to practice these habits all over again. There is a psychology to this and, oddly enough, the individual is blind to it because he has overwhelming debt to “prove” he NEEDS bankruptcy. And he’s got a bankruptcy lawyer telling him it’s not he’s fault. I was in this latter group. Nothing changed till I changed. Bankruptcy doesn’t just “set you back” in financial terms. It also erodes your precious confidence to eliminate a few simple errors in your judgement as well as your ability to begin to practice a few simple disciplines…every day.

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