There are a number of causes of bankruptcy, including divorce and reduced income. Have you acquainted yourself with the facts?
Between June 2019 and June 2020, there were over 650,000 non-business bankruptcy filings, according to United States Courts.
Personal bankruptcy filings are a last resort for consumers who find themselves with an overwhelming amount of debt. Whether you’re on the verge of bankruptcy or simply trying to educate yourself about the potential consequences of debt, it’s a good idea to learn about the circumstances that lead people to take this drastic measure.
Let’s take a look at seven common causes of bankruptcies.
1. Debt Collection Litigation
The leading cause of bankruptcies in the U.S. is debt collection litigation. Basically, this means people will declare bankruptcy once one or more lawsuits are filed against them. Understandably, this can be a tipping point when people realize their debt has become unmanageable.
Consumer debts will then be sold to “debt buyers” who purchase the debt for a deep discount. After that, buyers will aggressively pursue collection of the debt because they stand to profit handsomely if even some of the debt is paid off. If their constant calling and pestering don’t result in payment, they will often resort to litigation.
Debt buyers file millions of lawsuits against consumers every year. People often withstand constant contact from debt collectors without filing for bankruptcy, but the lawsuit typically pushes them to file.
2. Medical Bills
Another leading cause of bankruptcies in the United States is huge, unexpected medical bills. About 1 out of every 3 American workers is carrying medical debt of some kind.
When people can no longer work at their job due to a medical incident, they subsequently lose the health care benefits they received as a part of their compensation. Without a source of income and facing enormous medical bills, people are unfortunately forced to file for bankruptcy.
Sadly, it is more common for those over 75 to declare bankruptcy. Between 1991 and 2016, the number of people above this age who filed for bankruptcy more than tripled.
3. Reduction or Loss of Employment
Many people in the U.S. have debt and still manage to live paycheck-to-paycheck. If they lose their job, however, they can turn to bankruptcy as their last resort.
Whether they’ve been let go or laid off, many Americans are truly “one paycheck away from bankruptcy.” For example, there was a large spike in bankruptcy filings during and following the Great Recession. While current numbers don’t yet exist for bankruptcy filings that could result from the wave of unemployment brought on by the coronavirus pandemic, it is likely that people will similarly be pushed to file after losing their jobs.
4. Separation or Divorce
Many times, people don’t realize the high costs of getting separated or divorced. Many legal fees are associated with pursuing a divorce, but if the split is at all contentious, these fees can skyrocket.
Beyond the legal fees of filing for divorce, it is just simply more costly for each person to be responsible for their own expenses and households. When two people share one household on two incomes, it is less expensive.
In addition to the costs of divorce and running separate households, child support and alimony are also factors. An important aspect to consider if you’re divorced and contemplating bankruptcy: bankruptcy does not free you from the responsibility of making alimony and child support payments.
5. Excessive Credit Card Debt
It’s common for Americans to carry some credit card debt. Before the Great Recession, the standards for extending credit became quite low, as there was both laxity on the part of the lenders and a lack of forethought on the side of the consumers.
Credit card debt is often a way of dealing with the causes of personal bankruptcy in the U.S. If you lose your job, are going through a divorce, or have unexpected medical expenses, it’s tempting to deal with these financial difficulties by using credit cards.
6. Unexpected Expenses
Sometimes, life happens. One example of a major unexpected expense is when people’s homes are damaged in a natural disaster. Floods, earthquakes, landslides, mudslides, and sinkholes are not commonly covered in the standard policy of homeowner’s insurance, which many people don’t realize.
7. Student Loan Debt
Recently, more people have taken on tremendous amounts of student loan debt. One in every four Americans is struggling with student loan debt, according to CBS News. It’s important to note that filing for bankruptcy does not reduce or eliminate debt from student loans except in very rare cases.
Even though filing for bankruptcy doesn’t get rid of student loan debt, this expense is often the catalyst. This is because the weight of that debt will lead people to file in order to deal with their other bills.
No Matter the Causes of Bankruptcies, It’s Important to Have Proper Representation
These are some of the most common causes of bankruptcies. Unfortunately, it is not uncommon for people to face more than one of these issues at once. For example, the loss of employment might coincide with a divorce for someone who already has student loan debt.
Debt can be crushing, and bankruptcy is often a last resort for many Americans. If it’s time for you to create a fresh start for yourself financially, you’ll want to find an experienced lawyer to guide you through the process.