Does inflation cause an increase in bankruptcies?

On Behalf of | May 31, 2024 | debt relief |

High prices on everything are a common woe among many Americans. In recent years, many families have seen their grocery bills double and have made sacrifices to make ends meet.

With so many people already living paycheck-to-paycheck, you may wonder if more people are declaring bankruptcy as the prices of essential goods and services continue to rise.

Understanding inflation

Many factors can contribute to inflation, which is reflected in the price increase of goods and services and causes a decline in purchasing power. Some causes of inflation include:

  • Demand exceeds supply, thus driving prices up
  • Production costs increase, so businesses raise their prices to maintain profit margins
  • Workers demand higher wages to keep up with the rising living costs, which, in turn, raise production costs and prices

Inflation has a significant impact on customers and their debt. Essential expenses such as food, housing, clothing and healthcare consume a larger portion of their paychecks, leaving less available for paying down debt.

Furthermore, when prices rise, and incomes don’t keep pace, individuals may use their credit cards more often and take out personal loans to maintain their standard of living. Over time, this accumulating debt can become unmanageable. Currently, credit card debt is over $1 trillion in the United States.

Another issue contributing to bankruptcy during inflationary times is tighter monetary policies. Central banks try to curb spending and borrowing by raising interest rates, which can increase consumers’ debt costs.

Bankruptcies increased 18% in 2023 from the previous year, with 445,186 people filing. That number is expected to continue to rise. While inflation is not the sole factor in filing for bankruptcy, it is a contributor. 

For some families, filing for Chapter 7 or Chapter 13 bankruptcy is the only option for keeping a roof over their heads and food on the table. Having someone to guide them through the process will help provide them with a fresh financial start and hope for the future.