Too Broke to File Bankruptcy

Filing bankruptcy can be a very daunting decision, but it is also a life-changing, positive tool that provides a true fresh start. After filing the collection agencies stop calling, there are no more court judgments or hearings to collect debts, wage garnishments must stop, and there is immediate relief from the constant stress and anxiety. For low income individuals, bankruptcy relief is all the more important because every dollar is stretched to cover necessities like food and shelter. Yet, these are the individuals who are least likely to file bankruptcy, because they simply can’t afford the cost.

In a new study by the Federal Reserve Bank of New York, authors Stefania Albanesi and Jaromir Nosal analysed an anonymous sample of Equifax credit reports from 1999 to 2013 to track the characteristics of financially distressed consumers who do and do not file bankruptcy.

“A sizable group of individuals exists that does not file for bankruptcy, but seems unable to pay off their debts. These individuals are concentrated at the bottom of the income distribution, and therefore they are the ones who would be expected to benefit most from the relief offered by personal bankruptcy.” 

The Report considers the affect the 2005 changes to the bankruptcy law have had on bankruptcy filings. The 2005 changes added several complexities to filing, including two mandatory courses that must be taken before and after filing, requiring much more documentation, and a calculation called the Means Test, which is meant to determine whether a filer is eligible for a Chapter 7 filing based on their income and household size. All of these extras have significantly increased the cost to the filer, due to increases in attorney’s fees because of the added work involved and the cost of the two mandatory courses.

The authors reviewed behavior of individuals after becoming insolvent, or falling behind on debt payments by 120 days or more. Those who filed bankruptcy received a boost in their credit score afterwards. One quarter after the bankruptcy filing, the filers’ score exceeds a non-filing insolvent individual by 40 to 80 points. Albanesi and Nosal concluded “from this evidence that the ability to file for Chapter 7 bankruptcy is associated with better access to credit, and while both insolvency and bankruptcy are forms of default, the debt discharge associated with bankruptcy leaves filers in a better financial position than individuals who become insolvent in similar circumstances.”

The Massachusetts Debt Relief Foundation was started to address the overwhelming need for low income individuals to have access to filing bankruptcy with no cost. There is no legal fee, and we help clients obtain fee waivers for the two required courses and the court filing fee if possible. We accept clients whose household income is at or below 150% of the Poverty Guidelines. Our clients have absolutely no way to pay the costs associated with filing, but after filing experience countless financial and health benefits. If you know of someone who may benefit, please let them know there is help.

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