Inflation is rising faster than it has at any time during the past 40 years. The Federal Reserve is attempting to tap the brakes by raising interest rates, but prices are continuing to climb.
There are a few different ways this may impact bankruptcy filings in the Milwaukee area and beyond.
Does Inflation Hurt Or Help Borrowers And Lenders?
Inflation generally hurts everyone. That is why it makes everyone so anxious, and why the government is so keen to slow its rise.
It hurts borrowers who cannot afford to make payments on their debt because their income has not kept pace with inflation. These borrowers must spend more of their income on necessities like food and housing instead of paying off debts. If this persists, it can lead to higher default rates, which hurt lenders.
Lenders must also contend with the fact that the money they are owed is now worth less than it was when they lent it out. Raising interest rates can help with this, but many loans are fixed-rate, with rates lower than inflation. This is a benefit to borrowers, but only those that can still afford to make their loan payments.
Changes To The Law
Aside from impacting borrowers and lenders, inflation changes the law itself.
Federal law mandates that the Judicial Conference update the Bankruptcy Code every three years by increasing the dollar amounts referenced in the law to keep up with inflation. April 1, 2022 was the latest increase, and it was a big one. Dollar amounts increased by close to 11%. The last time rates were increased, they rose by only 6.2%.
Some of the dollar amounts that increased include:
- debt limits for individual who wants to file bankruptcy under Chapter 13
- the means test limits for individuals who want to file under Chapter 7 instead of Chapter 13
- the debt limits for filing under the relatively new “Subchapter V” of Chapter 11, which is used by small business owners
These dollar amounts are important because they help debtors figure out which chapter of the bankruptcy code to file under. Which chapter of the code then determines how their assets are treated by the court.
Another amount that increased is the amount of property that an individual debtor or family may exempt and keep if they file for personal bankruptcy. Exemptions can be used to protect a family’s home, car, personal belongings, or retirement accounts from being liquidated by the bankruptcy courts. Increasing the exemption amount is a good thing for debtors.
A Milwaukee Area Bankruptcy Attorney You Can Trust
Rising inflation puts Wisconsin families, businesses, and lenders in a tough spot. It can be difficult to know how to move forward when every path seems dangerous. Hanson & Payne, LLC’s experienced team of bankruptcy attorneys are here to guide anyone who needs help navigating difficult financial situations, and determining what options are available to them. Please contact us to schedule a meeting.