There many reasons people file bankruptcy. Here are the Top 5 reasons people file bankruptcy.
1. Medical Expenses.
One of the biggest reasons people file bankruptcy is for medical expenses. A study done a few years ago at Harvard University indicates that this is the biggest cause of bankruptcy, representing 62% of all personal bankruptcies. It is interesting to note the study shows that 78% of filers had some form of health insurance.
Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills – bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not.
2. Job Loss.
Another very significant reason people file bankruptcy is due to job loss. Whether due to layoff, termination or resignation, the loss of income from a job can be devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous. This isn’t just something for the low-wage worker. A middle class family with a $3000 p/mn mortgage, two car payments of $300 each along with all of the regular day-to-day expenses won’t last long without a steady income – even with some savings. Bankruptcy can put debts on ice giving you time to find a job and keep your family from having to live on the street.
The loss of insurance coverage and the cost of COBRA insurance also drain the job seeker’s already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay.
3. Mismanagement of Credit.
A third reason people file bankruptcy is due to mismanagement of credit. Some people simply can’t control their spending. But credit card companies make it worse by giving easy credit and increasing limits when they see heavy use. Credit card bills, installment debt, car and other loan payments can eventually spiral out of control, until finally the borrower is unable to make even the minimum payment on each type of debt. And, even if the borrower made the minimum payments, at the high interest rates credit card companies charge, once the balance gets high, the minimum payments don’t even cover the monthly interest digging the borrower deep into a hole. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative.
Debt-consolidation and home equity loans make it worse.
Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing for most participants. Home-equity loans make things worse by turning unsecured debt into secure debt putting your home at risk of foreclosure on their homes if they are unable to make this payment as well.
Borrowing from 401k and pensions is wrong.
Some people, in an effort to “do the right thing” and pay debts, resort to raiding thee own retirement accounts. DO NOT. Many people are unaware that funds in retirement savings are protected in bankruptcy allowing you to get rid of the bad debts but keep your hard-earned retirement savings that you will not be able to replace.
4. Divorce or Separation.
Another reason people file bankruptcy is after divorce or separation. Marital dissolutions create tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute.
5. Unexpected Expenses.
Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. Furthermore, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs.
If you have debts that are out of control, don’t do anything until you understand all there is to know about bankruptcy. It is a federal law that is designed to help you. It is not wrong to file bankruptcy.