The Typical Reasons People File for Bankruptcy

People file bankruptcy for all types of reason. The first thing to know if you’re considering bankruptcy is that our Founding Fathers anticipated way back in the late 1700s that people might not be able to pay their bills.

That’s why they put the right to file bankruptcy into the US Constitution. That’s right! You have a constitutional right to file bankruptcy.

Businesses file bankruptcy. Cities file bankruptcy. If these entities who normally have the advice of highly trained professionals can file for bankruptcy, then the individual consumer shouldn’t feel guilty if they can’t pay their bills.

Whatever the cause of your bankruptcy, you shouldn’t feel that you’re not entitled, that you’re less worthy than others or that you’re somehow a bad person.

Before filing, it’s always best to consult with a debtor/bankruptcy lawyer who can properly assess your situation and determine if there’s a way to avoid all together.

If bankruptcy is necessary, the lawyer will work with you to make the ordeal as painless as possible.

Here are some of the main reasons people file for federal bankruptcy protection.

Loss of a Job or Regular Income

The primary way people pay their bills is through their income. Many people work full-time jobs and get benefits such as medical insurance, vacation pay and overtime. Others have their own business or do a lot of freelance work to generate an income.

Due to the recession, many workers lost their full-time jobs. Other reasons for job loss can vary from the overall economy to the lack of success of their employer to a lack of necessary skills of the employee. In many cases, job loss is due to technology.

Employers often look to technology to do their work.

Medical Bills That Can’t Be Paid through Insurance.

Just one night in a hospital can cost tens of thousands of dollars. Those who don’t have insurance will often have to pay for the hospital stay, medications, the doctor visits and medical equipment.

Even those lucky enough to have insurance often have a high deductible and have to pay a percentage of the costs. The amounts can be staggering and can easily cause even the most frugal person to lose control of their budget.

Even those with really good medical insurance can have high bills. Some diseases may not be covered by the insurance policy. Sometimes the insured isn’t covered because of a pre-existing condition (though the Affordable Care Act was supposed to remedy this problem).

Loss of Value of your Assets

The recession caused the value of many homes and other assets to decrease. Many mortgages became more than the new value of the house causing the mortgage to be known as under-water.

In this scenario, selling the house doesn’t solve the problem because the loss of value creates a deficiency. Deficiency amounts have to be paid to the mortgage holders or other creditors.

Divorce or Separation

It’s simple math that two people can live together cheaper than one. Couples (whether married or not) only have to pay one rent or mortgage bill instead of two. Likewise, they only to pay one set of home utility bills.

Often couples only have to pay for one car. Married couples usually can include their spouse on their medical insurance policy saving the couple a lot in premiums. If children are involved, separated or divorced couples need to allocate for child care expenses and the time to properly take care of their children. Additionally, the legal fees for a divorce can be quite substantial.

Credit Card Debt

Many bankruptcies are caused by credit card debt.

Credit is often too easy to get and leads consumers into thinking they can just use their credit cards when what they really need is better financial planning. Credit cards often have very high interest rates forcing debtors to make monthly payments just to pay the interest while never paying down the principal debt at all.

Personal Liability on Business Obligations.

The “American Dream” for many citizens is to own start and run their own business. But businesses can take a lot of investing and a lot of planning. Many businesses don’t really return any money for a year or so after they are started.

Poor planning can cause the business to fail. Even the best businesses face stiff competition which may result in failure. Many small business owners agree to be personally liable on loan agreements even when the business is incorporated.

When the business fails, these obligations become due, forcing the business owner to need to file a Chapter 7 or a Chapter 13 bankruptcy.

Student Loans

The cost of college can be exorbitant. Some universities charge over a quarter million dollars for four years.

While student loans are generally not dischargeable in bankruptcy, a Chapter 13 bankruptcy can be used to create a better payment plan. Chapter 13 lets students who can’t manage the debt payments have up to five years to pay off the student loan when it becomes due.

Taxes

Federal and state taxes and even city taxes can mount. While these taxes may not be able to be discharged in a bankruptcy, they can be paid out over time in a Chapter 13 bankruptcy to give the taxpayer time to pay the taxes off in a reasonable and more affordable way.

Other Reasons Consumers Build Up Debt

Some other common reasons for getting into debt are making bad investments and gambling. Sometimes friends and family members co-sign on a loan.

When the loan becomes due and the person who got the loan can’t pay, the co-signer becomes liable. If the co-signer can’t pay off the loan or work out a suitable arrangement, then bankruptcy may become the viable alternative. Sometimes, a person has an accident. If they don’t have enough insurance, they can be held personally liable.

Bankruptcy may be a way to eliminate the debt or, at least pay out the debt over a 5 year period, depending on how the accident happened. Damage to property through flood, earthquakes and other unexpected reasons may create expensive repair bills that may not be fully covered by insurance.

In most cases, the debtor did not intend to fall behind on his/her bills.

When the debts are too much to handle, an experienced bankruptcy attorney can help.