Federal aid has so far avoided personal bankruptcies, but problems loom

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Nearly 40% of households earning less than $ 40,000 a year had already lost at least one job by May, according to the Federal Reserve, which has closely analyzed household finances. This compares to only 19% of households earning between $ 40,000 and $ 100,000 and 13% of households earning more than $ 100,000 per year.

A May 2006 survey by the Census Bureau also found that younger households, and those with less education and lower incomes, were the most likely to lose income during closings. They were also more likely to say they could not make their rent or mortgage payments and asked for forbearance.

Jenny Doling, a consumer bankruptcy lawyer in San Diego, said consumers whose debts began to snowball were generally better able to immediately seek bankruptcy protection. Indeed, bankruptcy automatically interrupts creditors’ collection efforts, providing insolvent consumers with a safe place to work out their three to five year repayment plans and potentially save important assets such as a house or a car.

But for many, the idea of ​​bankruptcy comes with a threat of stigma.

“Filing for bankruptcy, for consumers, is sort of an admission that you’re a financial failure, and people just can’t admit it,” said John Rao, an attorney at the National Consumer Law Center in Boston. “They always think they can get away with it one way or another.”

People are also shocked when they learn that the cheapest consumer bankruptcy case, a liquidation, will likely cost around $ 1,500. In 2005, when spending consumers abused the bankruptcy system, Congress tightened laws, increasing the cost of doing business and demanding that legal fees be paid in advance. The following year, the number of cases fell to approximately 600,000, from over two million in 2005, but started to climb again in the aftermath of the 2008 financial crisis. Last year, 752,160 cases were filed; this year, if deposits continue at their current rate, there will be 590,854 at the end of December.

When consumers are struggling, they often turn to their credit cards to make ends meet, thinking they will pay off the balance when they are called back to work. In the meantime, they only make the minimum monthly payment required.

The unpaid interest of each month, amounting to 20% or more, is then added to their principal balance, which makes their debt swell even if they buy nothing.

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