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Excessive Consumer Spending Versus Economic Stimulus

Bankruptcy presents somewhat of a paradox. It is a deterrent to excessive consumer spending but can also serve as an economic stimulus.

On a personal level, people understand that spending more than they earn results in financial problems. However, sometimes for a business to get off the ground, some investment risk is necessary. This is true even for a sole proprietor establishing a new business. In an economy where job creation is vital to boost production, our country encourages people to form new businesses. However, today’s unemployment rates overall reflect a shrinking instead of expanding economy. Therefore, we must work to strike a healthy financial balance on an individual and national level.

If owners of new businesses could not file bankruptcy for a failing business, business would stagnate. Saving money, investing wisely and paying bills on time are guidelines for financial success. However, bankruptcy also serves a purpose in our society of allowing people to wipe the slates clean and start over with lessons learned about how to avoid repeating the same mistakes.  Bankruptcy is a needed safety net in an economy that depends on new, start-up businesses and risk-taking.

Tax rebates funding bankruptcy costs

Forbes Magazine ran an article in March 2012 entitled Tax Rebates Boost Bankruptcies, and Why That's Not So Bad. The article provided interesting statistics based on a Columbia University professor's research. Tal Gross, PhD found that after 2001 rebates, bankruptcy filings increased by two percent. After 2008 rebates, bankruptcy filings increased by eight percent. He also noted that after the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 went into effect, bankruptcy legal and administrative fees on an average increased from $921 to $1,477, not counting credit counseling fees. Bankruptcy filings subsequently dropped. Gross’s opinion was that the BAPCPA restrictions prevented consumers from filing bankruptcy — consumers who qualified for bankruptcy protection. They simply could not afford to pay for bankruptcy.

While bankruptcy should discourage excessive consumer borrowing, it should not prevent legitimate bankruptcies, which can actually be a source of economic stimulus.

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