Top 5 Reasons Why People go Bankrupt
Top 5 Reasons for Bankruptcy
The bankruptcy statistics
in America are alarming. The past few decades have seen a dramatic rise
in the number of people who are unable to pay off their debts, and
Congress has recently addressed the issue with legislation that makes it
harder to qualify for this status. Following is a list of the most
common causes of bankruptcy in America today.
Medical Expenses
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A study done at Harvard University indicates that this is the biggest
cause of bankruptcy, representing 62% of all personal bankruptcies. One
of the interesting caveats of this study shows that 78% of filers had
some form of health insurance, thus bucking the myth that medical bills
affect only the uninsured.
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.
Job Loss
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Whether due to layoff, termination, or resignation, the loss of
income from a job can be equally 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.
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 might
not be able to recover from the lack of income in time to keep the
creditors at bay.
Poor/Excess Use of Credit
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Some people simply can't control their spending. Credit card bills,
installment debt, as well as 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. If the borrower cannot access
funds from friends or family or otherwise obtain a debt-consolidation
loan, then bankruptcy is usually the inevitable alternative.
Statistics indicate that most debt-consolidation plans fail for
various reasons and usually only delay filing for most participants.
Although home-equity loans can be a good remedy for unsecured debt in
some cases, once it is exhausted, irresponsible borrowers can face
foreclosure on their homes if they are unable to make this payment as
well.
Divorce/Separation
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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.
Unexpected Expenses
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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.
More Money Going Out Than Coming In
In the end it comes down to having too much money going out and not
enough coming in. There are ways to predict this and protect yourself;
by looking at how others have struggled and building up emergency funds.
There are many reasons why taxpayers are forced—or choose—to declare
bankruptcy. But many times, common sense, sound financial planning, and
preparation for the future can head off this problem before it becomes
inevitable. Those who are contemplating this possibility should seek a
credit counselor or financial planner before choosing this alternative.
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