Financial hardship is a scary reality for many people. Sometimes, despite our best efforts, debt can become overwhelming. This can lead to the difficult decision of filing for bankruptcy.
Bankruptcy doesn’t mean the end. It’s a legal process. It helps people manage debt and get a fresh financial start. But what exactly leads people down this path? Here are the ten most common reasons why people file for bankruptcy:
Job Loss
A recent study reveals that 78% of Americans live paycheck to paycheck. When life throws curveballs, bills keep coming, but paychecks don’t. Emergency funds run dry, health insurance vanishes, and the debt spiral starts. In 2022, personal bankruptcy filings were more compared to business bankruptcy filings. This highlights that unexpected income loss is a significant factor in most bankruptcy filings. Age discrimination can add insult to injury by making finding a new job challenging. However, seeking help with unemployment benefits, debt relief, and credit counseling is possible.
Medical Bills
One of the primary reasons for people filing for bankruptcy is medical debt. The American Bankruptcy Institute says 62% of the two million personal bankruptcies filed yearly are due to medical debt. Medical emergencies mean unexpected costs. Even with insurance, you may owe money upfront or for un-covered things. There is no doubt that bills can be complicated; charges require additional understanding. Medicine and treatments can be super pricey, even with insurance. People with long-term health problems need much care, which adds up quickly. And sometimes, you may have to see doctors not covered by your insurance, which means more enormous bills.
Crushing Student Loans
The cost of college has increased, making student loans a huge problem for young people. Many folks have to borrow money to pay for school. It is getting worse every passing year. Currently, the federal student loan portfolio totals over $1.6 trillion. About 43 million borrowers owe this money. The debt limits their employment opportunities. Buying a house, getting married, or starting a family takes a backseat in their life. It’s hardest on people with lower incomes and minorities.
Living Beyond Means
Sometimes, we spend more than we earn. This report from the Federal Reserve Bank of New York shows that Americans together owe a huge amount of money on credit cards. It’s $1.129 trillion as of the last three months of 2023. This large balance reflects individuals’ significant financial commitments by using credit cards. Easy access to credit cards and loans can make it tempting to live a lifestyle we can’t afford. Over time, this unsustainable spending can lead to a debt spiral that’s difficult to escape.
Divorce
Divorce can wreck your wallet in the US. Two homes cost more than one, and lawyers for divorce are pricey. Splitting debts can leave one spouse with a big chunk they can’t afford. This is especially true with child support on top. If one spouse was a stay-at-home person, they might struggle without their partner’s income. Divorce can also eat into savings, leaving no cushion for emergencies. All this financial stress can lead to bankruptcy.
Unexpected Expenses
Life is full of surprises, and not always pleasant ones. Unexpected expenses can arise suddenly, disrupting financial stability and causing stress. Major car repairs and unexpected home emergencies can strain budgets. These include things like a burst pipe or a leaking roof, leaving people struggling to cover costs. Also, natural disasters such as hurricanes, floods, and wildfires can cause widespread damage. They result in heavy property loss and financial hardship for affected communities.
In some cases, these surprise costs can overwhelm people. They may have to consider extreme measures, like bankruptcy, for relief. This shows how vital emergency savings are for navigating life’s uncertainties.
Ineffective Debt Management
Managing debt can be tricky, especially with many credit cards with high-interest rates. It takes work to keep track of all the payments and make progress. You need to learn more about budgeting or money to make good choices with your debt. You might not pay on time or not know how much you owe. Getting help from a financial advisor or learning more about money can make your debt more manageable and help you make better decisions.
Co-Signing Debt for Others
Co-signing is risky. If the borrower skips payments, you’re stuck with the debt. This tanks your credit score, making future loans expensive. It can also strain relationships and, in extreme cases, lead to bankruptcy. Co-sign only for those you trust completely and understand the risks before you sign.
Business Failure
Owning a business is a gamble – even a well-crafted plan can’t guarantee success. Statistics show a high risk of failure (20% in year one), and many loans come with personal guarantees (80%), meaning your house or car could be on the line.
Mixing finances blurs the line between business and personal debt. It leaves you responsible for everything if the company fails (only a 45% chance of surviving the past five years). The toll of failure can cloud judgment. This is especially true during this time of lost income and unpaid bills. But entrepreneurs can soften the blow by splitting finances and seeking legal advice. And by having a financial safety net, they can avoid personal bankruptcy.
Gambling Addiction
Gambling addiction can be a financial nightmare. People with this addiction lose control, keep gambling to win back losses and blow through savings. They may hide the addiction with risky loans and stolen money. The need to gamble can lead to unpaid bills. It can also cause maxed-out credit cards and desperate measures, like pawning valuables. All this adds up to significant debt. Debt collectors harass them, and wages get garnished to repay loans. Homes get foreclosed on, and cars get repossessed. It’s a scary cycle.
