How Inflation and Economic Instability Are Changing Bankruptcy Demographics

Bankruptcies are on the rise as a result of high living costs and rising interest rates. Credit defaults continue to be the leading driver of consumer bankruptcy filings, as revolving debt and daily expenses strain households.
Financial indicators are an important tool to analyze early warning signs of bankruptcy and can help predict the probability of financial distress. However, this analysis requires additional considerations beyond purely financial variables.

Inflation

Inflation makes it harder to pay off debt because more of each payment goes toward interest, and less is paid down on principal. This is why many people who declare bankruptcy say they couldn’t keep up with rising credit card bills. Inflation also pushes up mortgage rates and the cost of other household expenses.

Some researchers suggest that the proliferation of bankruptcies is the result of a “democratization of credit” that allows lenders to reach households who would have been turned down in the past due to income or creditworthiness standards. However, other factors may be at play.

Survey data show that a significant portion of bankruptcy filers report high levels of credit card and other debt, as well as a soaring level of unsustainable housing costs (Korol 2021a; Evans and Bauchet 2017). Soaring health care costs have long been an issue for Americans, and a hefty medical bill can tip the scales of many individuals’ finances.

Economic Instability

Over the decades, studies have shown that a number of economic factors can contribute to bankruptcy. They include household indebtedness, income fluctuations, unemployment rates and housing prices (Korol 2021a). Life changes like job loss, divorce or care for a family member can also disrupt households’ budgets. Often, these factors combine in a “perfect storm” that tips debtors over the edge.

Rising interest rates can raise borrowing costs and limit credit availability. This can strain businesses with high debt levels, increase the risk of default for highly leveraged firms and lead to an uptick in bankruptcy filings.

If large amounts of liquidity come into the economy without corresponding economic growth, it can cause inflation. For example, when a company fails and needs to file for bankruptcy, it may require large sums of money from the government or central bank to keep it going through a reorganization process. Permanent changes to bankruptcy law, as the United Kingdom enacted in 2008, can help reduce this risk by putting more power in debtors’ hands.

Population Migration

Several scholars pointed out that household determinants of consumer bankruptcy include the ratio of debt to income, house prices, unemployment and interest rates. They also consider credit constraints, such as the refusal to grant loans or the fear of applying for them, which may aggravate a household's financial problems (Fay et al. 2002; Fisher 2019; Evans and Bauchet 2017).

Diverse financial challenges account for the rise in bankruptcy filings in the 2021- 2024 period, the CBP reports. These include paying for accidents that insurance does not cover, the cost of raising children and other family expenses and the escalation of credit card interest rates.

The new census estimates show that immigration has been critical to the population rebounds of many major metro areas and their core counties during the peak pandemic years. Immigration has also helped soften peak pandemic-era domestic migration patterns, with smaller out-migration from coastal and Midwest metro areas and reduced in-migration to Sun Belt metro areas.

Credit Defaults

Credit defaults, particularly revolving debt like credit cards, are now the primary driver of bankruptcy filings. Rising living costs, high interest rates and life changes, such as a divorce or caring for a child, can push many consumers to the limit. If you are in a situation that desires bankruptcy, seeking help from a York PA bankruptcy attorney is your safest guard against wrongful bankruptcy filings.

The fact that bankruptcy is correlated with higher 90-day delinquency rates for new loans suggests that it is a signal to lenders of borrower risk. This is consistent with the reputation literature that shows that a borrower’s repayment behavior can convey valuable information about future credit quality to lenders.

The increase in Chapter 11 filings is a sign that companies — predominantly middle market firms — are having trouble servicing their debt. This could be a result of rising interest rates that increase borrowing costs, putting pressure on highly leveraged firms. It could also be the result of tighter credit availability.