The Administrative Office of the US Courts reported on Monday that 1.04 million bankruptcy cases were filed in federal courts in 2008, up more than 30% from the previous year. Still, bankruptcies this year did not surpass the 1.2 million cases filed in 2006 when people rushed to court in order to beat the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it harder for individuals to receive Chapter 7 protection.
So let's pause for a quick review: For some individuals and businesses, bankruptcy can offer the opportunity to start over by discharging debts that realistically can't be paid while offering creditors some relief on unpaid debts based on any assets that are available at the time of filing. The most common types of bankruptcy filings are Chapter 7, which involves liquidation of assets; Chapter 11, where a company or individual reorganizes; and Chapter 13, where lowered debt covenants or payment plans are implemented.
In theory, bankruptcy benefits the economy by allowing the opportunity for those who file to get a second chance and offering creditors some payment rather than nothing. However, in reality, those who file bankruptcy take a huge hit to their credit and face a long road to recovery.
So what does bankruptcy on the rise mean in the current landscape? It's further indication that people don't have better options other than to file and could signal increased tightening by banks who are coping with record lending losses this year.
Jackie DeAngelis is a writer and producer at CNBC. Previously she worked as a financial analyst at Oaktree Capital Mgmt. Jackie earned her J.D. from Rutgers Law School in 2008 and her B.A. in Asian Studies from Cornell University in 2002