Question

Why are more people declaring bankruptcy now than in the past? Does this have an effect on those who do not declare bankruptcy? How does declaring bankruptcy affect your ability to obtain credit in the future?

Answer 1

In the current day and age people are more access to cheaper credit i.e. the cost of borrowing is much lower. This results in the individual wanting to take sizeable loans for various purposes. It could be to start a new business/venture or maybe invest in a house, car, etc. Now when taking a loan the individual has to judge their own earning capacity to pay back that loan as banks have been a bit lenient when giving out loans which can be attributed to the originate to distribute model (banks convert the loan into an investment asset and sell it to other firms which in turn sell them to investor). Apart from this we have other factors that could lead the individual to borrow which could more for social reasons as well like the fear of missing out (FOMO) idea which is reinforced with Facebook and Instagram which mainly acts a more personalized TV ad.

Beyond this we can look at the rise of enterprenuers, there is a lot of talk with havin your own business or venture and take the risk of a giving up conventional job to do it. What this does is reduce your cash in-flow in the near term (in some cases to 0) and you are forced to dip into your savings to pay for expenses plus the cost of even taking up the venture which could result in more borrowings from the bank and if that venture doesnt take off youre in a sea of debt. This is more often the case as the number of people in the pool make it much harder for you to get any room to swim.

When bankruptcies or failures in financial systems occur we tend to see tightening of policies and rules which could have an impact on the borrowings or make it harder then before to borrow. If too many bankruptcies occur we could enter into recession which could make it much harder to generate the income you have done in the past to meet your current expenses, the current Covid-19 crisis has shown this as many companies have reduced salaries or cancelled hikes/bonuses, but this is really an extreme case. In general, if the people declaring bankrupties are on the rise but the impact is less significant on the economy then it would in most cases slow down the economy a bit, the real issue is with people having a herd mentaility which could result in a massive domino affect and if hundreds and thousands of people starting declaring bankruptcy then it could have a serious problem especially in the case of corporations (Eg: '08 crisis).

Yes, delcaring bankruptcy would have a negative impact on your credit score (FICO). But with regular debt payments after that you can bring that to a normal range, it would take some time. In the short term it would be difficult but over time this issue can be resolved.