Could a recession lead to bankruptcy?

On Behalf of | Jul 20, 2022 | Bankruptcy

You may have heard many financial experts claiming that the United States is heading for a recession. Exactly how drastic this will be remains to be seen. The last time there was a recession was back around 2008, and it was a very serious financial event for a lot of Americans. Many people lost their homes to foreclosure, businesses closed and much else.

If that is to happen again, could the recession itself lead to consumer bankruptcy cases? It’s easy to imagine how a recession could lead to commercial bankruptcy, as businesses won’t be able to survive if people don’t have the money to purchase products and services, but what about individuals? Could we also see a rise in Chapter 13 and Chapter 7 bankruptcy cases?

Job loss is a top reason for bankruptcy

The most common reason for bankruptcy in the united states is medical debt. But after that, in a close second, is job loss. In some cases, this could also indicate wage reduction. That may mean that someone had to find another job that paid less or that they had to work fewer hours.

Job loss and wage reduction are both more likely in a recession. Imagine that you work for a local company, and you took the job when times were good. It was a full-time position, and so you and your spouse got a mortgage and bought a house.

If a recession hits and that company has to close, you’re suddenly out all of the income that you were counting on. You may be able to find another job, but it may pay less than the one you had before. In an instant, that mortgage that felt so affordable when you applied for it is suddenly too much to take on. The same can go for credit card debt, car loans, student loans and much more.

It’s not a guarantee that this will happen. It’s not even a guarantee that the recession is going to occur, and many people will be able to keep their jobs through it. But it is worth noting that the recession could push unemployment numbers up, and that could lead to things like foreclosure or bankruptcy. If you do find yourself facing some of these issues, be sure you know about all of the legal options at your disposal.