A lot of people have been asking me how I think the current high inflation will affect the future of bankruptcy filings. I definitely think it will be an issue with wide-ranging effects and is worth discussing, as some economists argue that it is higher than any point in the last 40 years.
Inflation makes almost everything more expensive. Food, energy, household items, and rent can all cost more, sometimes dramatically. Used cars and housing are already more expensive due to supply chain and stock issues. These all make up the bulk of most household budgets. Now, to combat the high inflation the federal reserve has increased the base interest rate which will make mortgages, credit cards, and loans more expensive as well. In short, everything is more expensive right now.
Higher interest rates are meant to encourage savings and decrease spending. However, for most people you cannot decrease spending on food, utilities, rent and mortgages, and household items, at least below a certain point. More worryingly, salaries are not increasing at a rate to match the inflation. When things cost more and people earn the same amount, it is easy to figure out what will happen. People will need to burn through savings or increase their debt. And this will lead to more bankruptcies, unless salaries begin to increase or the government provides stimulus money.
It is not clear that any more stimulus money is forthcoming, and some economist believe this would only increase inflation further by putting more money in circulation to spend. Also, even though unemployment is historically low, there has not been a corresponding increase in household income. All of these factors make it fairly likely that bankruptcies will spike in the coming year (or years).
Spending on discretionary items (think luxuries, travel) and saving towards retirement is likely to decrease. On the plus side for some people who have wanted to buy a home but have been priced out of the overheated market, higher interest rates should cool off the housing market to some degree. The question will be how much housing stock is available. If it does not increase, housing prices may stay higher than normal. As mentioned above however, higher interest rates make home payments increase dramatically . The difference between 6% and 3% on your monthly mortgage interest rate could be the difference of $600 or $700 per month in your monthly payment.
Hopefully if you are reading this you will weather this coming storm with minimal problems. However, if the toxic mix of inflation, stagnant wages, supply chain issues, and increasing interest rates begins to eat away at your household savings, or even causes your debt balances to increase dramatically, you should keep the possibility of bankruptcy in mind. The process is intended for a fresh start, and the gathering conditions discussed above are the reason that it exists. If you have any questions or wish to set up a free consultation, call me at 412-414-9366.