The loss of a job, mounting medical expenses, and unpaid mortgages are some of the contributing factors that lead individuals to declare bankruptcy.
In most cases, a situation that leads someone to file for bankruptcy will be the result of the interaction of more than one contributing factor. In many cases, irresponsible financial behavior, such as taking on excessive amounts of debt, is a contributing factor; however, a person may choose to file for bankruptcy due to a variety of other reasons in addition to irresponsible financial behaviour.
- A person’s decision to file for bankruptcy may be precipitated by a confluence of negative financial outcomes.
- A person’s inability to handle their finances may be the result of poor choices made in the past or of other factors that are outside of their control.
- The loss of a job, mounting medical bills, and unmanageable mortgage payments are some of the most common factors that lead individuals to file for bankruptcy.
- Excessive spending is another factor that might put someone in a position where they have no choice but to declare bankruptcy.
There are 5 primary causes of filing for bankruptcy.
There have been a number of studies conducted to determine the reasons why people declare bankruptcy; some of the reasons are due to poor financial decisions, while other reasons are due to circumstances that are beyond their control. Loss of income, high medical expenses, an unaffordable mortgage, spending beyond their means, or lending money to loved ones are common contributors to individuals declaring bankruptcy. In many cases, filing for bankruptcy is the cumulative effect of more than one of these causes.
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A drop in one’s income
As a result of the fact that many people in the United States live paycheck to paycheck, the loss of a job or other sources of regular income can put a significant strain on their financial situation. The results of a survey conducted in 2019 by Charles Schwab found that 59 percent of Americans live paycheck to paycheck.
If you lose your job, you may also lose your health insurance. This leaves you especially vulnerable to incurring significant out-of-pocket costs for medical care, unless you are able to find alternative coverage in the interim.
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Medical Expenses
In addition to this, major factors that contribute to bankruptcy include medical expenses. In some instances, medical issues can also result in the loss of one’s job. Or, if you’ve already lost your job and your health insurance and then develop health problems, you might find yourself in a difficult financial situation.
There are a number of programmes that are designed to assist people who have lost their jobs in maintaining their health insurance coverage. The Consolidated Omnibus Budget Reconciliation Act, more commonly known as COBRA, is a federal law that enables many formerly employed people to continue participating in the health insurance plan of their former employer for a set amount of time.
COBRA, on the other hand, requires the employee to pay both their share and their employer’s former share of the cost of the insurance, in addition to an administrative fee. This makes it unaffordable for many people, particularly when they are without a job to support themselves financially.
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Inability to Afford the Mortgage, Leading to Foreclosure
Mortgages represent the single largest portion of household debt in the United States, far surpassing other types of debt such as credit card balances, auto loans, and educational expenses, as well as any other category. According to the Federal Reserve Bank of St. Louis, housing-related debt, which includes both mortgages and home-equity lines of credit, accounted for approximately 70% of household debt in the United States at the end of 2019. This percentage includes both mortgages and home equity lines of credit.
There are situations in which lenders will grant a borrower approval for a larger loan than the borrower is capable of repaying. Those who agree to take out these loans are putting themselves in jeopardy of having their homes foreclosed upon in the event that they are unable to make the required payments. They run the risk of being laid off from their job or suffering some other kind of financial setback.
Some mortgages have rates that are adjustable, which means that the homeowner’s monthly payments may increase in the event that interest rates do as well. It is possible that a borrower will be compelled to file for bankruptcy if they are suddenly forced to pay a higher mortgage payment than they can afford to pay.
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Overspending
Spending more than you earn or living above your means can quickly lead to a mountain of debt that is difficult to control. When a borrower maxes out their credit cards on frivolous purchases and then is unable to afford the required minimum monthly payments, they run the risk of seeing their debt quickly snowball due to the accrual of interest charges.
Make sure your income is going to be more than your expenses by drawing up a budget so that you don’t run the risk of spending more than you have. You can also put money aside each month to build up an emergency fund that can cover your costs for several months. This can make it possible for you to avoid going into debt in order to cover an unexpected expense.
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Providing Financial Assistance
When a person finds themselves in a position where they need to help out family members or other people, this can sometimes be one of the contributing factors that leads them to file for bankruptcy.
It can be challenging for people to say “no” when asked for financial assistance by a member of their family who is struggling, especially if the person in need is a parent or an adult child who is helping to support an elderly parent or an adult child.
Alternative Causes of Financial Ruin
There are, of course, a great number of other reasons why people choose to file for bankruptcy. For example, some may have burdensome student loan debts. Even though it is difficult to get rid of the debt associated with student loans through bankruptcy, many people still choose to do so in order to get rid of their other debts and be able to afford their other student loan payments.
Divorce and other forms of family dissolution can put additional people in a difficult financial position because of the high cost of legal representation.
Does Filing for Bankruptcy Wipe Out All Debts?
In most cases, filing for bankruptcy will discharge some or all of your debt, allowing you to begin anew with your financial situation; however, this is not always the case. Alimony, child support, taxes, fines, and student loans are examples of debts that may not be discharged through the bankruptcy process.
What are Some of the Drawbacks of Declaring Bankruptcy?
The ability to start over financially after declaring bankruptcy is one of the benefits of filing for bankruptcy; however, doing so will have a negative impact on your credit score. It can take up to ten years for a bankruptcy to be removed from your credit history.
Is It Possible to Get a Divorce and File for Bankruptcy at the Same Time?
You can submit a petition for bankruptcy at any time, but during the divorce process, the court will only handle one of your cases at a time. You should carefully consider whether you want to file for bankruptcy before or after you get divorced.
Conclusion
People who are being forced to live beyond their financial means as a result of their debt may find relief through the process of declaring bankruptcy. There are many different things that could lead to you being in a position where you need to consider filing for bankruptcy.
You can help prevent yourself from having to declare bankruptcy by maintaining a healthy financial state by adhering to certain practices, such as limiting the amount of debt you take on to what you are confident you will be able to pay back, and generally spending less than you earn.
