There are significantly more bankruptcy cases filed by individuals or spousal couples than by businesses. Such cases reached a high of just over two million in 2005, when many rushed to file due to impending laws that would make filing for bankruptcy more difficult. Cases rose again with the Great Recession of 2008, reaching around 1.5 million annually as unemployment spiked drastically and both individuals and business saw a rapid loss of wealth. The number of cases has since tapered off to around one quarter of that figure with 370,685 cases of personal bankruptcy filed in 2022.
Chapters of bankruptcyDifferent types of bankruptcies are distinguished by their chapter in the U.S. Bankruptcy Code, the most widespread being Chapter 7, Chapter 11, and Chapter 13. The form of debt relief provided by a bankruptcy filing is dependent on which of these chapters the case is filed under. Chapter 7 is the most common bankruptcy claim in the U.S. and, while it is available for both individuals and businesses, the vast majority of cases are for non-business debt. In 2022, nearly two-thirds of non-business bankruptcy claims were filed under Chapter 7. Chapter 7 bankruptcy provides debt relief through the liquidation of the debtor’s assets. Once the assets are collected and sold, the outstanding debt needs not to be repaid.
For those averse to liquidation, or those with a consistent income, Chapter 13 or Chapter 11 may be more suitable alternatives. Chapter 13 is an option for those who prefer to keep their assets and instead pay back the debt over a longer period of time. Under a Chapter 13 bankruptcy, debtors can arrange a three- to five-year repayment plan that replaces the previous terms of the loan/s. Chapter 11 bankruptcy is similar to Chapter 13, but is instead used primarily by partnerships, corporations and sole traders with higher levels of income. Under Chapter 11 bankruptcy, the business continues to operate under a court-appointed trustee and is reorganized in consultation with the court. This process may lead to businesses turning their financial situation around.
Causes of bankruptcyAccording to a survey conducted between 2013 and 2016, 77.8 percent of people who filed for bankruptcy in the U.S. either very much or somewhat agreed that losing income contributed to their filing for bankruptcy. While population certainly has a strong effect on the number of cases filed in each state, state legislation on issues such as healthcare, labor rights, and consumer protection may influence a state’s number of bankruptcy cases. States with a higher poverty rate, such as Mississippi, also tend to have a higher rate of personal bankruptcy due in part to tougher economic conditions and low wages.
The U.S. financial crisis not only saw a surge in personal bankruptcy cases, but also in the number of businesses that filed for bankruptcy. In 2009, there were 60,837 business bankruptcy claims filed in the U.S., compared with around 28,000 filed just two years before. The amount of assets companies had when filing also ballooned at this time. As of 2022, the largest all-time bankruptcy claim in the United States remains Lehman Brothers in 2008, with assets worth nearly 691 billion U.S. dollars at the time of filing. This event, which had a significant domino effect on the U.S. economy, marked an important point in the Great Recession’s timeline. As with personal cases, bankruptcy filings from businesses have also continued to fall since then, with a total of 13,125 business claims reported in 2022.
Bankruptcy in societyThere are a number of demographic factors, such as gender and race, that can contribute to low wages. Men earn more than women in every state, even when less qualified. When holding a doctorate or professional degree, a woman would likely make less than a man with a master’s degree. There is also a notable racial wage gap in the U.S. In addition to income inequality, there also appears to be a significant racial disparity among Americans in debt, with significantly higher rates of debt delinquency among communities of color than with a majority white population. As of 2022, of those from communities of color, 35 percent had debt in collection, compared to 22 percent of people from majority white communities.
Other contributing factors that lead to personal bankruptcy in the U.S. are medical expenses, mortgages, divorce, and student loans. Medical debt stands out from other factors contributing to bankruptcy, due to the fact that it is an involuntary expense. The majority of adults in the U.S. have incurred medical debt in their lifetime. As of 2021, around 37 percent of adults in the U.S. had medical debt. Of those, 22 percent reported that the amount owed was between 5,000 and 9,999 U.S. dollars of medical debt. Hospitals, including not-for-profit hospitals, continue to file lawsuits or additional court actions against patients with outstanding medical bills. From 2018 to 2020, just 10 of the largest 100 U.S. hospitals by revenue accounted for approximately 37,806 court actions filed against patients, despite many being publicly funded, or nonprofit organizations.