Top Reasons People File Bankruptcy

Key Takeaways

• Bankruptcy is a debt relief option available when you have exhausted all other possibilities.
• It has the most significant impact on your long-term financial health along with lifetime consequences.
• In some cases, bankruptcy is the only debt relief option that will provide the necessary creditor protections.
• The most common reasons people file for bankruptcy include medical debt, job loss, overspending, divorce, and unexpected events that create a financial crisis.

Life is filled with unexpected twists and turns. Yet sometimes, those turns result in a financial crisis that leaves you with few options outside of bankruptcy. When you face a financial dilemma and cannot pay your bills, bankruptcy may be available to provide the financial reset you need. Below are the top five reasons people file bankruptcy:

Unpaid Medical Bills: Despite having insurance and the Affordable Care Act increasing the number of insured, medical debt remains the top reason people file for bankruptcy. According to the Journal of Public Health, in 2019, 66.5% of bankruptcies resulted directly or indirectly from medical debt. High deductible policies, increased out-of-pocket expenses, or facing an unexpected or rare illness can quickly deplete savings and put medical care costs out of reach.

Medical bankruptcy includes more than unpaid medical bills. In many cases, the medical emergency becomes a financial emergency because a family member must take time off work to address the medical situation. Medical emergencies directly impact your finances, whether the health crisis happens to you or a family member. Higher costs and reduced income can leave you with few options outside of bankruptcy.

Job Loss is another major cause of bankruptcy. When most families require two incomes to pay bills, any reduction can have a catastrophic impact on family finances. Whether you expected the loss or not, it can take months to find a comparable job that will stabilize your budget.

The loss of income can damage the best of finances, especially if it lasts for a sustained amount of time. The further along you are in your career, the more difficult it is to replace that income, which could leave you at the mercy of creditors when the job market shifts or declines.

Overspending and using more credit than you can manage is another common reason for bankruptcy filings. You never expect overspending to catch up with you because you have a plan. Maybe you charge purchases anticipating that overtime pay, the next bonus, or your tax refund will pay off the account. You successfully repeat the cycle year after year.

Then something happens. The bonus dries up, or the tax refund is not what you expect, and you are underwater, barely making ends meet. Sometimes those $10 monthly payments gradually become $100 payments. They inch higher and higher until you find yourself struggling to make the minimum payment before you realize you are in over your head.

Divorce and separation are also among the top five reasons for bankruptcy. When a couple splits, the same income must support two households, making it difficult and sometimes impossible to keep up with existing bills.

Unexpected expenses round out the top five. Major catastrophes can include natural disasters such as floods or earthquakes or more everyday events like a significant accident or property theft. Inadequate levels of insurance could leave you with more bills than you can afford to pay.

Final Thoughts

Whether you face a case of excessive medical bills, overspending, a natural calamity, or divorce, having too much debt for your income may temp you to file bankruptcy. Before you make an appointment with an attorney to discuss bankruptcy, know that you may have other options. Debt settlement could give you the debt relief you need without the stigma and long-term consequences of bankruptcy.

In many cases, lenders, realizing you are on the brink of bankruptcy, will agree to accept a lower payoff and allow you to pay the bill over multiple payments. If you are interested in exploring the option of debt negotiation, contact us today.

FAQ

• Why do people file for bankruptcy?

  Bankruptcies occur when you have too much debt for your income and need protections offered by the bankruptcy court. Filing Chapter 7 might allow you to cancel debts without repayment. Chapter 13 requires you to repay creditors some of what you owe but could let you keep more property.

• Are there alternatives to bankruptcy?

  Bankruptcy should always be used as a last resort. In many cases, if you have a steady income, you can receive debt relief through other programs like debt settlement. These programs allow you to negotiate new loan terms and only require you to repay some of what you owe.

• What is a good reason to file bankruptcy?

  If you do not have regular income and have few assets to repay creditors, bankruptcy may be the best debt relief option.