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Reliance on overdrafts linked to high risk of bankruptcy

On Behalf of | Nov 19, 2023 | Consumer bankruptcy |

Inflation has proven difficult for many consumers in Tennessee to overcome. Rising costs for essentials weaken people’s ability to cope with unexpected costs, like a medical emergency or broken vehicle. In these situations, you might overdraw your bank account when paying bills. Although many banks have courtesy programs that allow for occasional overdrafts, they come with fees that only worsen your cash shortfall. The added financial stress, according to researchers, can tip some consumers into bankruptcy due to an inability to meet growing financial obligations.

Multiple overdrafts produce highest bankruptcy risk

Surveys of people who have overdrawn their bank accounts indicate that 90% of them had additional financial challenges after overdrawing their accounts. Among those who overdraw their accounts multiple times every month for more that $400, 98% of them faced ongoing struggles that they could not get ahead of.

Overdrafts and worsening credit access

If you are routinely overdrawing your account, then your credit score will reflect your financial instability. People falling short each month by $400 or more saw their credit scores go down.

Lower credit scores result in higher interest rates when you need to finance something. In an environment with high interest rates to begin with, people who have to pay more for financing face even higher loan payments. Eventually, consumer bankruptcy presents itself as a possibility for people with snowballing debts.

Hardship for many income levels

Overdrafts and excessive borrowing are not issues that only low-income people have to navigate. Debts and spiking prices for living essentials can overburden higher-earning people as well. The financial stress experienced by all socioeconomic levels has resulted in a 10% increase in bankruptcy filings between June 2022 and June 2023.