Charlotte Miller

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It is true that the number of personal bankruptcies in the US has declined in recent years. But many households are still over-indebted. In order not to get you into such a situation, it can help to deal with the causes …

For personal bankruptcy and portfolio recovery lawsuit, there are some clichés. This also includes the idea that it is primarily people who end up in over-indebtedness who cannot control their excessive consumption. There are such cases. The most common reasons for personal bankruptcy are different. 

Nevertheless, it makes sense to deal with your own consumer behavior. It not only depends on what you consume, but also how you pay for it. Surveys as well as data from credit agencies show that those who, despite their manageable income, pay a lot on credit and cashless, are particularly at risk of over-indebtedness. There is a simple reason for this. Especially the many financing offers, which are aimed at a rather poorly financed clientele, are tempting because the rates are often very low. The more of these installment contracts you take on, the more the monthly fixed expenses grow. And you quickly lose track of things.

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Personal bankruptcy due to excessive spending

The same can apply to cashless payments. Paying by debit or credit card is convenient, but it can lead to losing track of money and thus losing track of expenses. In addition, bank and credit card fees can cause additional costs. In the case of credit cards, it can help to compare the conditions in advance. Because behind cheap offers there are sometimes fee traps. If you want to keep an eye on your finances, you should keep a budget book.

The most common reasons for over-indebtedness and personal bankruptcy are still unemployment, illness and a permanently low income. Divorce can also be a trigger. Divorce is often expensive in itself, but it can also throw you emotionally off track for a while, which has a detrimental effect on the economic situation. It is interesting in this context that the reasons for homelessness are often the same and are a direct consequence of over-indebtedness or emotional states of emergency.

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The risk of personal bankruptcy can be minimized

The unemployed also have the problem that debts are not included in the calculation of transfer entitlement. And unemployment benefit II is usually not enough to meet liabilities. However, these can occur at any time due to unforeseen expenses. The chronically ill have the problem that they have to pay for a substantial part of the medication themselves. Those who are then unemployed or low-wage earners quickly get into financial difficulties.

The problem with this is that these situations, which are the cause of over-indebtedness, can sometimes hardly be influenced. It is therefore advisable to make provisions in good times and put money aside – even 50 dollars a month can form a small cushion for emergencies over time. And, the lower your own income, the more precisely you have to budget and control expenses. The risk of personal bankruptcy cannot be avoided, but it can be minimized.

Bankruptcy: Reform brings more legal certainty

As a creditor, you are in an uncomfortable position when a debtor goes bankrupt. Under certain circumstances, the insolvency administrator can still claim back payments that have already been made after years. That should now change with a reform of the bankruptcy law.

If a debtor goes bankrupt, the problem as a creditor is often twofold. On the one hand, it is very likely that one can only hope for a fraction of the original demands. And of this fraction, a sometimes considerable amount goes to the insolvency administrator. But things can get worse so far: If the debtor has made payments although the impending insolvency was already foreseeable, the bankruptcy administrator can still claim these amounts back ten years after the original due date. Lots of liquidators wait a particularly long time with such reclaims in order to maximize accrued interest and make additional profit in this way – on the back of the creditors, who in the end are left with almost nothing.

Reform should prevent reclaims

That practice is now changing. The grand coalition of the Union and the SPD has decided to reform bankruptcy law, which is welcomed in specialist circles. It creates more legal certainty and is intended to prevent such reclaims as far as possible in the future. The reform is expected to take effect before the general election.

The innovations are intended to reduce the period for recovering claims from the current ten to only four years. In addition, the burden of proof is reversed. So far, the bankruptcy administrator could simply assume that the creditor was aware of the impending insolvency of the debtor. Weak evidence of this was sufficient. In the future, it must surely be proven that the creditor had this knowledge. In most cases this will be difficult or even impossible. The number of reclaims after many years will, therefore, be expected to decrease massively.

Avoiding bankruptcy becomes more difficult

“Inappropriate hardship for creditors should be avoided, including for employees who are entitled to their wages for work performed,” says a press release from the federal. The proposed changes to the law should therefore “ensure that the practical application of the bankruptcy avoidance law creates an appropriate balance between the insolvency creditors and those against whom claims under insolvency avoidance law are directed.” But improvements should also occur for the debtors. Because debtors often agree on installment payments in order to get their finances under control again in good time. 

Older people are more often in debt

“Even if the reasons for indebtedness are different and individual, unemployment is the most common reason for consumer bankruptcy. The formula is therefore simple. When the number of employees increases, the number of personal bankruptcies decreases. However, he also points out that many citizens do not file for bankruptcy, although they could do so, but their income is so low that it would not be attachable anyway. The bankruptcy figures therefore do not reflect the actual total number of all bankrupt households.

However, according to the study, there is a group with a less positive tendency: among older people over the age of sixty, the number of bankruptcies increased slightly again. Over the past five years, the total number of bankruptcies in this age category rose by almost a quarter (23.9 percent). The analysts see the growing risk of poverty in old age due to low-wage jobs and fragmented employment histories. This means that in many cases the pension is no longer enough to survive and those affected almost inevitably have to become over-indebted – similar to the unemployed.

Unemployment often leads to personal bankruptcy

It is also expected that this problem will worsen in the coming years. The opposite is true for the younger generation: in people between the ages of eighteen and twenty, the decline was as much as 16 percent. And there are also gender-specific differences: Significantly more personal bankruptcies are still registered by men than by women. The difference is almost a third.

“The reasons,” the study says, “include unemployment and reduced work, income poverty, failed self-employment, inefficient housekeeping, changes in the family situation, such as divorce or separation and illness.” The average debt is around 33,000 dollars.