It is important to understand the common causes of bankruptcy in order to prevent them from happening to you. These are the reasons most people need to file.
The causes of bankruptcy vary wildly across the spectrum of wild spending and financial hardship, with the latter leading the way as to most cases that are filed each year. Yes, reckless spending does happen on some bankruptcy journeys, but it is not the norm.
In the following article, we’ll be looking at the 10 most likely scenarios that bankruptcy filers face. Let’s run some numbers!
1. Serious Injury
Among the leading causes of bankruptcies is a serious injury. These have lasting effects that not only knock someone out of work for a period of time but also change the earner’s ability to provide for themselves moving forward.
Simple injuries like ankle sprains, groin pulls, hamstring issues, or tennis elbow might still enable one to show up and put in a full day of light-duty. Over time, however, chronic injuries will inhibit a person’s mainstream duties and professional development.
2. Medical Conditions
Long-term medical issues are another contributing factor to bankruptcy. These are particularly harmful because the medical expenses that patients incur are ongoing and can total in the many thousands of dollars, even with a quality health insurance plan in place.
That’s because of having to meet deductibles and share in a percentage of the out-of-pocket expenses. While doctors and medical clinics are often willing to discount patients paying out-of-pocket without insurance, it can start to affect the quality of care that one receives for treatments such as cancer, kidney disease, and heart-related issues.
3. Losing a Job
Losing a job creates a perfect storm for bankruptcy on two fronts. First, there is the sudden loss of income. One might still be eligible for unemployment income for a brief period of time, but it’s generally a fraction of what their earnings were and nowhere near enough to cover the living expenses that a family can amass while one or both parents are employed.
Secondly, there is the loss of health insurance. If one is going through a prolonged medical issue (see No. 2) at the time they lose their job, whatever coverages their insurance was paying for increase exponentially. Combining this with loss of income is catastrophic for finances.
4. Underemployment
While not the number one cause of bankruptcy, underemployment has certainly emerged as a concern in recent years with the rise of automation and companies slashing staff in the wake of the pandemic. It’s not unusual for many in the workforce to need three or four part-time jobs to keep the lights on.
Complicating matters further is the fact that most part-time jobs do not offer full-time benefits to their employees. As a result, workers are still on the hook for obtaining their own health insurance. The Affordable Care Act made it possible to do this with the aid of a subsidy, but if the worker makes too much money, it can affect the amount they qualify for or disqualify them altogether.
5. Bad Spending Habits
Overspending is also a common cause of bankruptcies, and this just occurs when individuals find themselves financing too much of their lifestyles. They buy cars and homes they can’t afford, boats, furniture, and any big-ticket item because the initial payment terms seem innocuous.
The problem is that too much spending on credit puts you in an overexposed state should a major medical emergency arise or you lose your job. It might even lead to a creditor suing you. It’s better to live within your means and do without or purchase scaled-down versions that you can actually afford.
6. Divorce
When looking for a “bankruptcy lawyer near me,” many people do so as a direct result of searching for a “divorce lawyer near me.” That’s because divorce can leave both parties feeling strapped for cash or in weak earning positions.
Divorce settlements are designed to force compromises on both parties. So, that could mean the breadwinner spouse taking on more debt than they’re prepared to handle while the other spouse is not in the position to up their income to deal with the debt they do incur. (Likely because of sacrifices they made to their career for the good of the marriage.)
There’s also the phenomenon of revenge spending, where one spouse runs up credit card debt prior to the initial filing. They might do this if they anticipate the other spouse is going to file. Regardless of the reason, divorce is a harbinger of debt.
7. Unforeseen Expenses
You might find yourself looking for the best bankruptcy lawyer to help you through filing because of unforeseen expenses outside of the ones already mentioned, but no less common. Your child needs braces, your parents go into long-term care without adequate financial planning, or you get stiffed on a shared debt with a business partner.
8. Addiction Issues
Dealing with your own addiction or that of a loved one costs money. You have to pay for rehab, counseling, perhaps even bail money to stay out of jail.
While not as common as some of the other factors presented here, the cycle of addiction has put many families into financial hardship and goes beyond basic unforeseen expenses. Due to the nature of addiction itself, they are expenses that could recur for the rest of one’s life.
9. Poor Financial Planning
There are many in this world who are great earners but still living paycheck to paycheck. They give too much, spend too much, don’t track what they make or owe. It all adds up.
At a certain point, the hammer will fall. When it does, filing for bankruptcy may be the only way out.
10. Losing a Spouse
A bankruptcy attorney may see clients who find themselves facing bankruptcy because of decisions their spouse made in life that they knew nothing about. When that spouse dies, they could find themselves learning a hard lesson about their money situation.
Knowing the Causes of Bankruptcy Is Only Half the Battle
The causes of bankruptcy presented above are a mix of irresponsible financial behaviors and financial hardship that is beyond the control of any one individual. But here’s a little secret: all people will face a financial hardship of some type in their lifetime, regardless of how responsible they are with money.
It’s not a judgment of your character, just something you have to deal with when the time comes. Sometimes bankruptcy is the answer. If you’re facing that situation now, consider contacting the bankruptcy lawyers at Husker Law at (402) 415-2525 and setting up your appointment today.
