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Interest Rate Hikes & Inflation Have You in Over Your Head? Bankruptcy May be an Option for You

While moderate inflation in a steady upward trend has been expected of the American economy for the last century, this period of sudden high inflation has sent many average Americans into financial distress.

On Behalf of Veitengruber Law | Apr 11,2023



Numbers from February showed inflation starting to ease up slowly. The Consumer Price Index (CPI), one metric used to indicate the rise and fall of inflation, rose by only 0.4% in February. Many are contributing this slowdown to the Federal Reserve's aggressive interest rate hikes. The Fed has raised interest rates eight times over the last year, increasing them by 4.5 percentage points. The stock market has been experiencing a period of extreme volatility, as high inflation and the March bank crises stoked fears of financial upheaval. A constant barrage of news reports has followed: interviews with economists, updates from government higher-ups for their hot take on US financial affairs, and graphics displaying lots of numbers crowd our screens. But what does all of this mean for the average American?

While moderate inflation in a steady upward trend has been expected of the American economy for the last century, this period of sudden high inflation has sent many average Americans into financial distress. As the prices of goods and services rise, the buying power of the average consumer decreases. A dollar today can purchase less than a dollar a year ago. When inflation increases between 2% and 4% a year, consumers lose purchasing power at a much steadier rate. They can adjust their income, expenses, and financial obligations to adjust slowly. When inflation is as elevated as it is right now, consumers lose buying power twice as fast. It may be difficult—or even impossible—to make the sudden budget changes required to keep up with this rapidly changing financial reality.

What is worse, periods of high inflation have historically disproportionally impacted lower-income consumers, who, on average, have fewer savings and less wiggle room in their budget. When you live paycheck to paycheck, a sudden drastic price increase can overstress your already tight budget. Lower earners tend to spend a higher percentage of their monthly income on food, energy, and shelter—commodities that are difficult to substitute or simply go without. Instead, these individuals and families are left to determine which bills to pay at the end of the month.

And while governments and banks have a vested interest in dampening inflation, their methods can add additional stress to the average consumer's bottom line. As policymakers raise the minimum interest rate to curb inflation, the cost of borrowing increases across the loan and credit industry. This means payments go up for mortgages, credit card debt, auto loans, and even student loans. The higher the interest rate, the more your costs will increase. When this happens, there is an increased risk of loan delinquencies and defaults.

If the risk of delinquency, default, or repeated late payments sounds familiar, you could be experiencing the harmful effects of high inflation and increased interest rates. This can be a helpless feeling. After all, you cannot personally do anything about the rise of inflation or increased interest rates. But just because many of these economic issues are outside your control does not mean you are powerless to change your financial reality. Bankruptcy can be a powerful tool to overcome debt and improve your financial position.

Here are four big ways filing for bankruptcy can alleviate financial stress caused by inflation:

1.   Tackle High-Interest Debt

As policymakers continue to raise interest rates in response to rising inflation, your high-interest debts will only get more and more expensive. This particularly impacts credit card debt since credit cards already carry higher interest rates than mortgages or other loans. It can be difficult to pay down your debt when you suddenly pay more of your monthly credit card bill towards interest and less towards the principal amount. Filing for bankruptcy will allow you to restructure or completely wipe out your debt. If you restructure your debt under Chapter 13, your debts will still accrue interest, but it will be much less under a bankruptcy plan than it would have been on the original loan or credit agreement. If you file for Chapter 7, your debt will likely be discharged entirely.

2.   Prevent Foreclosure, Repossession, or Utility Shut-Offs

 If you are at risk of foreclosure, repossession, utility shut-offs, or cannot get debt collectors to stop harassing you, bankruptcy can prevent further action from being taken against you. Once you file for bankruptcy, the automatic stay period goes into effect that will immediately stop any attempts to collect on debts. The automatic stay can buy you the time to get current with your past-due debts or find another solution. A repayment plan under Chapter 13 can also allow you to make payments against the debt with a more realistic monthly payment.

Contrary to popular belief, you do not necessarily have to lose all your assets in bankruptcy. You can use state and federally mandated exceptions to save specific property from entering into bankruptcy. You will not automatically lose your home in bankruptcy. In fact, bankruptcy is a powerful tool to stop the foreclosure or Sheriff's sale of your home. We can help you protect your assets and stay in your home if that is one of your bankruptcy goals.

3.   Fix Your Credit

Yes, filing for bankruptcy will negatively affect your credit score. A bankruptcy will remain as a negative mark on your credit report for seven years. However, repeated late payments, a high debt-to-income ratio, and loan default can also significantly impact your credit score. Bankruptcy allows you to begin improving your credit score again. You can start improving your credit score from day one after you discharge your debts or from the first day of your repayment plan. And seven years after you file, the bankruptcy will fall completely off your report and will no longer affect your score. A better credit score will give you access to better financing opportunities in the future.

4.   Regain Financial Power

Whether you restructure your debts under Chapter 13 or discharge your debts under Chapter 7, bankruptcy can empower your financial future. Restructuring or getting rid of debt will free up more of your income to help you manage the increasing costs of everyday expenses like food, utilities, and housing. When you spend less on debt, you have more to spend on the things you and your family need not just to survive, but to thrive. Bankruptcy is an excellent opportunity to learn more about debt, financial planning, and how to plan for the unexpected. That way, you are better prepared for the next financial crisis.

Know that you are not alone: millions of other Americans are struggling to keep up with the increasing financial demands of inflation, high-interest rates, and the higher cost of living. If you are having trouble meeting your financial obligations, filing for bankruptcy in NJ might be the right choice for you. Veitengruber Law will take the time to listen and truly understand your situation so we can advise on the best path forward to protect you, your family, and your financial future. Contact us today for a free consultation!



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