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Top Five Causes of Bankruptcy

March 16, 2012

According to the National Bankruptcy Research Center, more than 1.3 million bankruptcies were filed in 2011, or about one for every 175 American adults. We all know the economy is bad, jobs are scarce, and the housing market is still poor. But what may surprise you is what causes an individual to file for bankruptcy protection.

#5: Unexpected Expenses
A catastrophic event can push a person to file bankruptcy. You can lose everything to a fire, flood, or a tornado, and an “act of god” can break your finances. Insurance does not always cover everything needed to make a person whole again, and sometimes there are associated expenses not covered by insurance. Likewise, theft can cause you similar harm, including identity theft, fraud, or other stealing.

#4: Divorce
A divorce can flat wreck your finances. Legal fees, domestic support obligations, and separate household expenses drain both incomes. Even if you think you are the “big winner” in a divorce, ruining your spouse can cause you unexpected financial grief. Many people are not aware that a family law judge cannot relieve you of a joint debt liability. So even if the family law judge tells your ex to pay a car loan or credit card bill, if he or she is unable, the creditor can still collect from you.

#3: Credit
In 2005 Congress passed new laws aimed at reducing the number of bankruptcies. There was a misconception that many people were abusing the bankruptcy laws to escape from their legal liabilities. It is almost comical that while this law was being debated, major banks were approving people for home loans they could not afford. And the federal government was guaranteeing many of these loans!

The number three cause of bankruptcy is “abuse” of credit. In a small number of cases that means credit card debt. Sometimes it is an inescapable cycle of payday loans. Many times it is an unaffordable mortgage.

#2: Unemployment
“No job” usually means “no money.” Whether temporary or permanent, a job loss will devastate personal finances. To make matters worse, unemployment also means a loss of health insurance and retirement plans, which can have long-lasting negative consequences.

#1: Medical Expenses
The top reason individuals file bankruptcy is not credit card abuse, not divorce, and not even job loss. The number one reason is medical bills. A Harvard University study cited that 62% of all personal bankruptcies were caused by a medical issue. It’s not just those uninsured that are affected, the study also found that 78% of these filers had medical insurance. Medical bills can quickly run into hundreds of thousands of dollars and wipe out savings, retirement accounts, and home equity.

Bankruptcy is not for bad or immoral people. Bankruptcy is a safety net for good people when bad things happen. Bankruptcy is a federal legal process that is provided by the U.S. Constitution. If you need bankruptcy relief to manage an unmanageable situation, seek help from an experienced bankruptcy attorney.


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