bankruptcy during recessionPeople are struggling in the current economic environment. Many are having difficulty affording goods and services because of the sharp increase in prices. According to the U.S. Bureau of Labor Services (BLS), inflation reached 9.1% at the end of June 2022.

While some people increased their savings during the pandemic, a survey by Forbes Advisor found that two-thirds of Americans report dipping into savings to pay the higher prices wrought by inflationary pressures. People’s relative incomes have not kept up. Because of the high rate of inflation, real income has declined by 3% as compared to the price increases.

At the same time, many financial experts say that a recession might be an inevitability. A recession occurs when the country’s gross domestic product (GDP) declines during two successive quarters, which it did during the first quarter of 2022 by 1.6%. If the Bureau of Economic Analysis finds that the U.S. GDP fell again during the second quarter, it would mean that we are technically already in a recession.

If you are like many people who are struggling to pay higher prices while also dealing with increasing interest rates on your existing debt, you might wonder whether you should consider filing bankruptcy now, during a coming recession, or after a recession is over. Here are some things you should understand about recessions and the timing of bankruptcy filings from the Shulman Law Office.

Understanding Recessions

Recessions are cyclical and a normal part of the economy. During a recession, the economy slows down. This means that people begin spending less, and businesses produce less because of the reduced demand. The stock market declines, which can result in investor panic. As the economy starts to slowly regrow, the Federal Reserve might increase interest rates to tamp down inflation and prices.

The effects of reduced consumer spending and business production include companies undergoing layoffs, which increases the unemployment rate while businesses attempt to protect their profit margins by laying off workers and shrinking their labor force. This can result in people losing their jobs, struggling to find new ones with the same salaries, and having difficulty obtaining credit and loans as banks tighten their criteria because of the heightened risk of default.

How Recessions Affect Individual Households

Recessions can vary in terms of their lengths and consequences. However, most recessions show an increase in layoffs and increased rates of unemployment. Typically, people also can have more trouble accessing the credit market as banks become concerned about potential default rates. Over the past few months, Federal Reserve Chairman Jerome Powell has increased interest rates several times to try to tamp down inflation. This also increases the costs of borrowing for car loans and mortgages. This means that even if you qualify for a credit card, auto loan, or mortgage, you will pay a higher interest rate than you would have a year ago.

During a recession, many households will deal with job loss and unemployment, which can make it difficult for people to pay bills and their daily living expenses. In some cases, people might face foreclosures and evictions because of their inability to pay their mortgages or rent. Job loss and unemployment can also cause family strife, depression, and an increased potential for divorce. People might resort to raiding their 401(k) accounts or IRAs to try to make ends meet, especially when they don’t have sufficient savings in an emergency fund to carry them through.

The unemployment rate during and shortly after the Great Recession peaked at 10% in Oct. 2009. While the current unemployment rate remains at a historic low, that likely is temporary and should be expected to increase as inflation remains at sky-high levels and the economy slows as a result.

You might also expect the interest rates on your loans or debt to go up, which will make your monthly payments more expensive during a recession. When increased interest rates on debt and loans are combined with unemployment and higher prices overall, the combination can be devastating for individuals and families. You might also have trouble consolidating your high-interest debt into a single, fixed-rate loan with a lower interest rate because of the banks’ tightened lending standards and the impact of the downturn on your credit score.

Timing of Bankruptcy and Recessions

If you are already struggling to purchase goods and services while also making payments on your credit card debt and living expenses, you might be considering bankruptcy. However, you might not know whether you should file for bankruptcy protection now or wait until during or after the likely recession.

One thing to consider is how to prepare for a recession. According to Washington Post columnist Michele Singletary, two recommendations for people to follow to prepare for a recession include paying down credit card debt and building your savings. If you are already struggling with paying your credit card and other debts and are only able to send in the minimum payments each month while also having no savings, you are already behind in terms of being prepared for an impending recession.

In that case, it might make the most sense to file for bankruptcy protection now before the effects of a recession fully hit. If you file for Chapter 7 bankruptcy, you might be able to discharge your unsecured debts, including credit card and medical debts, within a couple of months. This would leave you without the obligation to continue paying those debts, freeing up some of your income so that you can start building your savings while making it easier to afford the higher prices on the goods and services you need for your basic daily living requirements.

Waiting until after the recession hits to file for bankruptcy when you are already in a precarious financial situation might not be a good idea. If you do, you could face compounding financial problems that could be more difficult to dig out from under, including potential car repossessions, foreclosure, eviction, and/or job loss. If you instead file for bankruptcy before you suffer any of the potentially negative impacts of a recession, you could go into the recession debt-free with a few months of savings in your emergency fund. This could make it easier for you to survive during the recession and emerge on the other side in a better financial position.

If you don’t qualify for Chapter 7 bankruptcy now but work in an industry that is likely to be hit hard by recessionary pressures, you might think that it makes sense to wait to file for bankruptcy

until you are laid off from your job. If you have been unemployed for an extended period or are making below-median income, you should be able to qualify for Chapter 7 bankruptcy protection. You should also keep in mind that if you file for Chapter 13 bankruptcy now, however, your payments to the trustee will likely be far lower than what you are currently paying each month to your creditors. Filing for Chapter 13 bankruptcy now instead of betting that you will lose your job during a recession might be a smarter choice, depending on your circumstances.

Finally, waiting until after a recession to file for bankruptcy makes the least sense. By the time the recession is over, you should instead be in a position to improve your financial circumstances and forge ahead. If you instead wait and allow your financial situation to become even more precarious throughout a recession, you might end up dealing with unnecessary stress for a significant period.

If you are struggling under the weight of your debt now and do not have any savings or the ability to save because of your financial circumstances, the best time to file for bankruptcy protection is probably now before the recession hits. By filing for bankruptcy, you might place yourself in a better financial position to weather the impending economic downturn by making lifestyle changes, building your savings, and living debt-free.

Talk to the Shulman Law Office

If you are considering bankruptcy and when to time it, you should speak to an experienced bankruptcy attorney at the Shulman Law Office. We can help you assess your financial situation and determine when it might make the most sense for you to file your petition. Contact us today for a free consultation at (408) 297-3333.