Why people file for bankruptcy: the top 5 reasons
By Barbara Craig, Attorney at Law
Even though the economy is improving, millions of people are still overwhelmed with debt and are candidates for bankruptcy protection. Bankruptcy filings decreased about 10% in the past year, but there were still over 1 million cases filed within the last 12 months.
Here are top 5 reasons people file bankruptcy:
1. Medical expenses
Despite ongoing efforts towards health care reform, medical expenses are still #1 among the leading causes of bankruptcy filings. Many Americans remain uninsured due to the high costs of medical insurance. Even those who have health care benefits may be overwhelmed with large co-pays or deductibles that are too costly to handle.
2. Loss of income
More Americans are back to work this year but a large portion are making do with lower pay or are working less hours than they were before the great recession. And there are still millions more who remain unemployed or underemployed: as of October, 2014 9.3 million people were unemployed, and 7.1 million were underemployed. A significant reduction in income that lasts for more than a few months can be financially devastating and is one of the leading causes of bankruptcy.
3. Misuse of credit
Many people find themselves struggling to make payments on their home mortgage, especially when the property is worth less than what they owe the bank. New cars are great, but a large payment and/or high interest rate loan to go with it does not make the family budget any easier to manage. And excessive credit card spending, rising credit card interest rates, and declining credit limits are a trap that many people fall into. Any one of these scenarios – or facing all three at the same time – lead many Americans to file for bankruptcy relief.
Separation or divorce is one of the leading causes of bankruptcy filings due to high legal fees, child support payments, or alimony judgments. These expenses are difficult to squeeze into a household budget, particularly for anyone trying to support the family on a single income. While filing for bankruptcy cannot eliminate responsibility for child support or alimony payments, discharging other types of debt can make it easier to keep up with these payments.
5. Unexpected disasters
Fire, earthquake, vehicle accidents, or other natural and man-made disasters can occur at any time. Often people go without insurance because they can’t afford it. But being caught uninsured or underinsured when you need it most is one of the most frequent causes of bankruptcy filings.