The (Surprisingly Common) Top Causes of Bankruptcy
In the post-COVID years, news reports flood our feeds describing an alarming rise in consumer debt and defaults in credit. There are about 33,100 average monthly searches on Google for the term debt relief. This means that people are facing a financial problem, and highlights the need to better understand the reasons driving individuals and businesses towards financial insolvency. As a consumer bankruptcy lawyer, I have witnessed firsthand the impact of this trend on individuals grappling with overwhelming debt. In this article, we will explore some of the top causes of bankruptcies I have seen lead people to filing for bankruptcy relief. By looking at what’s causing people to file for bankruptcy protection, and the impact of bankruptcy on both individuals and the broader economy, we can gain valuable insights about warning signs that someone may need to consider filing bankruptcy.
Common Reasons People File for Bankruptcy
As you may have suspected, there isn’t a single main reason that lead people to for relief under the Bankruptcy Code. Life happens, and as a result, some people needing to complete and file bankruptcy petition so that they can get their financial lives back on track. In my experience as a bankruptcy attorney, no 2 bankruptcy filers are alike. Each case has its nuance. The below, however, are trends that will often serve as a red flag or warning that someone may want to start exploring the possibility of a bankruptcy filing.
Medical Expenses
It’s unsurprising that with the ever-increasing cost of health care for American families, one of the top reason why people file bankruptcy is medical expenses. Many people will often get in touch about filing a medical bankruptcy, because they have bills from emergency health care, a longer term hospital stay, and medical issues requiring ongoing health care that, for one reason or another, isn’t covered by health insurance, or there was a gap in insurance coverage. Imagine being at home recovering from illness, only to find a medical bill in the mail from the doctor that provided care to you in the hospital. Not only are these bills expensive, often thousands of dollars for a single hospital visit, but they can also be very mentally taxing, because they often come from the doctor’s offices that provided the treatment, and people feel bad that they cannot pay.
In my experience, though, it isn’t just the unexpected medical expenses and co-pays that are the only problem. Often, the illnesses or injuries that started the event often resulted in the person not being able to work or generate income. From this inability to create income because of a medical problem, everything started to snowball, including hefty medical bills, even for individuals with health insurance. When they are healthy enough to get back to work, they are so far under debt, and no longer want to choose between their health and financial stability, ultimately leading to seeking relief under bankruptcy law.
Job Loss and Loss of Income
The loss of a job can have devastating financial consequences, especially if the individual does not have sufficient savings to cover expenses during the period of unemployment. Many times, the loss of employment came at the worst time for clients, losing their employer-sponsored health insurance (and couldn’t find a similar replacement plan under the Affordable Care Act marketplace) just as they were having a child or were facing their own health issues. As a result, they ended up with medical costs as an unexpected expense.
Moreover, without a steady source of income, many individuals struggle with debt management, and how to navigate between necessary household expenses to make ends meet and keeping up with credit cards and other unsecured debt. Even if receiving unemployment benefits, peoples’ basic living expenses often remain unaffordable and keeping up with debt become unmanageable. Eventually, many of people in this situation find themselves in a position where debt settlement or financial counseling can’t help because there is no regular income, and a personal bankruptcy appears to be the only viable option.
Excessive Credit Card Debt and Overspending
The Federal Reserve Bank of New York reported that, as of the close of Q4 2023, credit card debt in the United States reached an all-time high of $1.13 trillion. Almost all bankruptcy filers I have worked with had some credit card and/or personal loan debt as part of their case. Credit card debt is one of the most common contributors to personal bankruptcy. High-interest rates, late fees, and penalties can quickly escalate credit card balances, making it difficult for individuals to pay off their debts. Often times, these debts were incurred when the person was in a better financial position, but then because of a change in circumstances (such as loss of work, health-related issue, etc) they no longer were able to keep up with payments.
There are some people, however, that are just not good with debt management. Credit counseling and financial management just don’t resonate with them. These kinds of people often engage in overspending, living beyond their means, or accumulating high levels of debt, often purchasing property like cars or technology just to keep up with status trends. For these people, when property gets repossessed or there is a threat of wage garnishment, they will often seek the protection of a chapter 7 bankruptcy.
Unexpected Expenses
Unforeseen expenses can have a significant impact on a person’s financial well-being. Whether it’s unexpected home repairs, car breakdowns, a family member in need, or money being stolen, these urgent situations require immediate attention and financial resources.
Unfortunately, these types of unexpected financial situations can often quickly deplete any existing emergency savings and push individuals into defaulting on their obligations. If your car breaks down, and you need your car to drop your kids to school or get to work, you need that car repaired or replaced immediately. Because most of the person’s available funds will go to solving that emergency, they tend to fall behind on other expenses, which often results in decrease in credit score. When your credit score goes down, qualifying for financing, such as a debt consolidation loan, becomes harder and more expensive. When faced with an unexpected expense and there’s no emergency fund in place, individuals will often explore bankruptcy relief to help cope with the financial burden they are enduring.
Gambling Losses
With the huge rise in online gambling and sports betting apps, gambling addictions (and the losses they create) can have devastating financial consequences for individuals. The strong compulsion to gamble often leads to significant monetary losses, as well as damage to relationships, resulting in a mounting debt that can feel insurmountable.
Because of the addiction, approaches such as credit counseling or other financial counseling may not be feasible. In such desperate circumstances, a bankruptcy filing may be seen as a last-ditch effort for those trapped in the grips of the gambling addiction. It may serves as a potential lifeline, offering a fresh start and a chance to regain control over their financial future. By seeking bankruptcy protection, individuals can the financial problem created by their addiction, providing them with a glimmer of hope for a better financial future.
Legal Judgments
Imagine waking up to a notification on your phone or in your email that your bank account has been frozen. This is often the experience of someone facing a legal judgment that was entered against them. Sometimes a judgment may be entered without the person having appeared in court (sometimes by choice, sometimes they were not properly served).
Because of the staying power of a judgment (for instance, in New York, a judgment can be a lien against property for as long as 10 years, and can be renewed for another 10 years) they can have devastating impact to a person’s credit score, even though the creditor doesn’t attempt to collect for years. A person may also elect to file bankruptcy for debt relief to get rid of a lawsuit against them, since the time, energy and money to defend against a lawsuit can be pretty significant.
Another reason people turn to bankruptcy is to stop the enforcement of a judgment, such as a foreclosure from default in your mortgage payment, or to stop a wage garnishment or bank levy (which often leaves a person unable to afford to pay their basic living expenses).
Small Business Failure
I often get calls from business owners asking whether it might make sense for their business to file bankruptcy. When a small business encounters failure, it can often be a catalyst for the business owner filing for bankruptcy. Looking into a business bankruptcy can arise from a number of different factors, including economic downturns, poor financial management, or unsuccessful business strategies. When revenue declines and debts grow, the business owner may struggle to meet both business as well as personal financial obligations, including loan repayments and operational costs.
This situation is even more precarious in the case a person was operating a sole proprietor. When someone is running a small business as a sole proprietorship, they are personally liable for business debts. As a result, a creditor can enforce a judgment they obtain against the person’s personal assets. Since the bankruptcy code does not provide for a discharge of debts for a business entity in a chapter 7 bankruptcy, and businesses are not allowed to This financial strain can ultimately force a business owner to seek bankruptcy protection as a means to manage their outstanding debts and liabilities.
Divorce and Family Law Issues
Family disputes, including divorce, are not only emotionally taxing but can also have significant financial implications. The division of assets, alimony, child support, and legal fees associated with divorce and other family law disputes can deplete individuals’ financial resources quickly. Divorce or separation often means that where there was once two incomes supporting a household, now there is just one, resulting in financial troubles. For many individuals, the financial strain of divorce can push them towards bankruptcy.
Domestic support obligations, such as court-ordered spousal maintenance and child support, are nondischargeable debts under the bankruptcy code. As a result, when a person has to pay their regular, every day bills, and then add on the responsibility of paying a domestic support obligation, it can become a financial problem really quick, and they may need to explore filing a bankruptcy petition to obtain debt relief.
Which to file: chapter 7 bankruptcy vs chapter 13 bankruptcy
Choosing between Chapter 7 vs Chapter 13 bankruptcy necessitates a thorough examination of one’s financial situation, as the decision is highly specific to individual circumstances. For individuals with minimal assets, most or all of which are exempt, may look more at Chapter 7 bankruptcy to provide a financial fresh start.
On the other hand, Chapter 13 bankruptcy may be more suitable for those with higher-than-average income or significant nonexempt assets, as it allows you to pay debts under a repayment plan over three or five years, potentially enabling you to retain ownership of your property. Often, a chapter 13 bankruptcy can act as a de facto debt consolidation. Consulting with a bankruptcy law office as early as possible can help you determine the most appropriate path based on an analysis of your income, assets, and expenses.
Conclusion
Filing a personal bankruptcy is often a result of various factors that converge to create overwhelming financial challenges for individuals. As a consumer bankruptcy lawyer, I have seen clients filing bankruptcy due to medical expenses, losing a job, poor financial management, divorce, unexpected expenses, student loans, credit card debt, gambling losses, and judgments. These items are some of the top causes of bankruptcies I’ve seen in my practice, and the American Bankruptcy Institute has reported much the same. You should use this as guidance, and if you find yourself facing one or more of these situations, you may want to consider speaking with a bankruptcy lawyer as soon as practicable.
By understanding these common top causes of bankruptcies and seeking professional guidance early in the process, individuals can take steps to regain control of their finances and work towards a financial fresh start. The Law Office of Richard Kistnen can help you do exactly that – speaking with a bankruptcy attorney to determine whether filing bankruptcy would be feasible in your case, and whether it would provide the debt relief you’re looking for. Don’t wait any longer, call the Law Office of Richard Kistnen today at (718) 738-2324, or click this link to book your confidential, no obligation virtual bankruptcy consultation right now.