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Salem MA Bankruptcy Law Blog

Why people file for bankruptcy

The rate at which Massachusetts residents and others are filing for bankruptcy is dropping. However, there were still 772,594 bankruptcy filings during a 12-month period that ended in June 2017. One of the main reasons why people file for bankruptcy is because they lost their job. Typically, an individual didn't have enough money to cover his or her mortgage, car payment and other expenses. Ideally, a person will have an emergency fund that can last for up to 12 months.

Even if someone doesn't lose his or her job, a reduction in hours or salary could still make it difficult to make ends meet without an emergency fund. Dealing with medical bills can lead to bankruptcy for a couple of different reasons. First, it may be necessary to put those expenses on a credit card. Second, an individual may choose to make medical payments as opposed to staying current on a mortgage or other debt.

Cities with the highest average credit card balances

Many Massachusetts residents are struggling to make their credit card payments, but a study from CreditCards.com reveals that individuals and families in other parts of the country have even more serious revolving debt problems. The consumer financial advice website looked at how much the residents of America's 25 most populous cities and regions owed to credit card companies and how long a worker earning average wages would take to pay this debt off, and Boston ranked sixteenth with an average balance of $6,455.

The figures suggest that credit card debt is an especially serious problem in Texas. Dallas-Fort Worth, Houston and San Antonio occupied the second, fourth and fifth places on CreditCards.com's list, and paying this debt off would take workers in these cities at least 19 months. Boston residents earning the area's median wage would have their revolving debt balances cleared in 14 months.

How to start paying down credit card debt

Rising interest rates and growing credit card debt balances may create financial issues for Massachusetts residents and others in the future. While increasing debt levels are generally seen during good economic times, it is possible to have too much debt. Now may be the best time for a person to take a strong look at his or her overall financial situation.

This could include taking a look at the amount of money a person owes and how much interest is being paid on that debt. It may be possible to reduce the interest rate by transferring a balance to a new card. Those who have credit card debt may also want to create a plan to pay off the debt and stick to it. How a person chooses to pay off the debt depends on what will work best for them.

Credit debt is up, but so are credit scores

Residents of Massachusetts who have higher credit card debt than they did a year ago might take some comfort in knowing that they are not alone. Americans have more credit card debt now than they did a year ago, according to an Experian annual study, and the Federal Reserve reports that in 2017, the country reached a record high of more than $1 trillion in credit card debt. But the good news is that credit scores are up, too, which suggests that Americans are doing a pretty good job of handling their debts.

The average American has credit card debt of $6,375, which is up 3 percent from last year. But credit scores, which are based on credit history, are averaging 675 on the range of 350-850. That's the highest the average American credit score has been in the decade since the 2008 recession.

Survey of over 1,000 adults shows lifelong expectation of debt

Most people in Massachusetts live with some form of debt, whether it be from credit card bills or home loans. A survey of 1,114 people across the nation conducted by CreditCards.com produced a pessimistic view about people's expectations of ever escaping debt. Large majorities of respondents across all age groups expected to never achieve a debt-free life.

Among Millennials, 65 percent believed that they would never pay off debts or could not imagine when it might happen. A slightly larger number of Generation X members, 68 percent, accepted the likelihood of always being in debt. Baby Boomers showed even less confidence as 70 percent doubted their abilities to overcome debt. Within the Silent Generation, which represents people over age 72 in this survey, 83 percent anticipated dying in debt.

Looking at debt levels by generation

Massachusetts residents may be pleased to hear that the average credit score in America has increased in the past year to 675. That is the highest it has been since 2007. While many assume that millennials struggle with credit, they do not have the lowest average credit score when broken down by generation. That would be Generation Z with an average score of 634.

Millennials have an average credit score of 638, and their overall financial situation may be improving. They tended to enter the workforce during the height of last decade's recession, which made it difficult to find jobs or secure their financial futures. However, their debt levels have decreased 8 percent while their mortgage debt has increased 6 percent. Baby boomers and those who are over the age of 70 both have average credit scores of more than 700. Baby boomers have an average score of 703 while those over 70 have an average score of 729.

Retirement assets may be exempt from bankruptcy

People who file for personal bankruptcy typically do so because they cannot pay their bills with their current earnings and assets. However, many people who seek relief from the Massachusetts bankruptcy courts have some money saved for retirement. Bankruptcy laws protect some retirement accounts from being liquidated, but there are circumstances that could cause a person to lose all or some of their invested savings.

Employer-sponsored accounts are covered by ERISA, the Employee Retirement Income Security Act. This means that people with 401(k) accounts don't have to take hardship withdrawals in order to pay their bills and may file for personal bankruptcy instead. Traditional and Roth IRA owners who have less than $1.3 million invested in those accounts won't have to worry about bankruptcy trustees liquidating any of their funds as long as they aren't in the process of taking distributions from the accounts. Pensions may not be exempt from bankruptcy depending on whether they are covered under ERISA or qualified as exempt under the tax code.

Credit card debt is on the rise

Credit cards are being utilized by consumers in Massachusetts and other states now more than ever. According to a report from Consumer Financial Protection Bureau, credit card accounts and the average amount of credit card debt among consumers have increased over the last two years. The number of credit cards paid late or not at all has also increased.

By the middle of 2017, credit card companies had extended over $4 trillion in credit to U.S. consumers. This also represents an increase but is lower than the $4.4 trillion extended in 2008.

Homeowners pay more credit card interest than renters

For many Massachusetts residents, owning their own home is an important part of achieving the American Dream. However, a recent study from the consumer finance company NerdWallet suggests that house, apartment and condominium buyers run up far higher credit card bills than those who rent their homes. While homeowners are usually able to deduct mortgage interest and certain other expenses on their income tax returns, they also pay almost twice as much each year in revolving debt interest, according to the study.

The NerdWallet study places much of the blame for the higher revolving debt balances of homeowners on annual property maintenance and repair costs. These expenses typically amount to between 1 and 4 percent of a property's appraised value, but they can be much higher when major work, such as replacing a roof or repairing foundations, has to be done. It is the unanticipated nature of large repair costs that often prompt homeowners to turn to credit cards, according to NerdWallet.

Changes to bankruptcy rules

Massachusetts creditors and debtors alike should know about the modifications made to the Federal Rules of Bankruptcy Procedure. The changes, which became effective on Dec. 1, 2017, pertain to Chapter 13 bankruptcy cases and can impact creditors who have judgment liens and secured and unsecured claims against the debtors in bankruptcy.

Secured creditors are now required to submit proof of claims in order for the claims to be recognized in the Chapter 13 plans. While the failure to file the proof of claim will not cancel the creditor's lien, no plan payments will be allocated to the creditor.