Top 5 Reasons for a Bankruptcy Filing

Bankruptcy rates in the United States are steadily dropping off following the worst of the COVID pandemic, but that’s just a general trend. For some select businesses and individuals, it’s true that the last few years have actually been a boon for their personal finances. But for most folks, it brought hard times. Some of the root causes of bankruptcy are out of the average person’s control, and more often than not several factors combine to create a financial circumstance that feels hopeless. But this is why bankruptcy was created–it’s a safeguard and a way to start anew.

Here are the top 5 reasons that people find themselves facing bankruptcy.

1. Income Loss

Losing a job is difficult in and of itself, but when it combines with other precarious financial situations, it can begin a major down spiral. Studies and polls have shown that many Americans do not have enough money stashed in savings to be able to care for unexpected or emergency expenses. That means that without the recommended 3-6 months’ reserve, pressing needs like food, clothing, and shelter can quickly become an unbearable burden. Costs of training, education, or relocation to pin down a new position would just add to the debt.

Job losses aren’t generally anticipated and so are difficult to plan for. Employees rely on the regularity of their paycheck to make large purchases, like a new home, vehicle, or annual college expenses. So on top of the everyday needs, these hefty planned-for expenses could become unrealistic and unsustainable if unemployment strikes. There are also many individuals in our community who live from one paycheck to the next, with very little flex in their budget. If they aren’t able to quickly find a new job and don’t have a friend or family member to fall back on temporarily, getting in touch with a chapter 7 bankruptcy lawyer is likely their best option.

2. Medical Insurance and Related Expenses

Health insurance and employment are tied together more than we might immediately realize. For instance, if an individual has a job that provides medical coverage, that cost is often taken out of their regular pay but is also partially funded by the employer. While the cost is calculated into their budget, it doesn’t hold a candle to what purchasing a brand new policy might cost. Add on the stress and panic if an existing condition or medication need demands coverage, and it’s clear why medical expenses could press someone into seeking the help of a bankruptcy attorney.

At the same time, a serious medical condition could be the root cause behind job loss. If that’s the case then a worker who loses their job could find it very hard to continue vital care. They could become stuck in a vicious, dangerous cycle. And if healthcare was never part of their benefits package, then trying to pay the premium and manage a serious illness while juggling a host of other expenses could become unsustainable. This situation brings up a chicken-and-egg sort of scenario, and it’s clear just how intertwined employment and healthcare are, and how one without the other might pose serious problems for anyone. That’s especially true for someone whose family is dealing with a chronic condition like cancer, or an emergency health situation like a catastrophic car accident. Even someone with valid health care coverage could have a high deductible or get caught with out-of-network fees and not-covered but necessary services, tests, or treatments. 

Individuals who have lost a job that offered benefits do have the opportunity to continue coverage for a time under federal COBRA law. The problem is, that option will ironically always be pricier than what they paid while employed because now they will need to also cover their previous employer’s share. So healthcare will cost more, and they won’t have regular pay to help with that cost. 2010’s Affordable Care Act was supposed to make this tricky situation easier to navigate, but medical bankruptcies are still common. It’s a difficult situation and one that could mean a consultation with an Ohio bankruptcy lawyer.

3. Housing Expenses

Stable housing is vital, but it’s also expensive. In fact home mortgages make up a large part of many households’ debt. Home equity loans and lines of credit are also sources of debt that are tied to a home’s value, and added together, these debts can be immense. The frightening truth is that since the home itself is the collateral for these loans, if someone finds themself already struggling after losing a job or dealing with high medical bills, these various factors could combine to spell disaster in the form of home foreclosure. Filing for bankruptcy puts a stop to creditors and banks chasing individuals down for payment, so for many, working with a chapter 7 bankruptcy lawyer is the best path forward. 

In the current home buying market, folks are also spending far more than they typically would to secure a home for themselves and their families. Lenders are more cautious after years of mortgage defaults on properties that buyers couldn’t afford, but even a buyer that meets their requirements can be faced with unexpected life circumstances. Taking on a larger-than-normal mortgage is already risky, but if someone is then hit with illness or job loss, that challenge grows exponentially. 

4. Overspending

This is probably the first thing the average person thinks of when they hear the word bankruptcy. The general perception is that someone who needs the help of a bankruptcy attorney must have just racked up one too many credit card bills from unnecessary shopping sprees. They got themselves into this and now they want their slate wiped clean.

While this might be true in some cases, more often than not it’s just one contributing factor. And the root cause for the overspending might not be obvious. Overspending means different things to different people, and it could be for a multitude of reasons. Someone who holds a job but still struggles to make ends meet might occasionally use a credit card to buy groceries or gas, or to pay for medical bills or other necessities. Now and then they might splurge on a grocery purchase or a shopping trip for necessary items for the home or family. If these expenses are paid off every month, there isn’t an issue. The problems arise when debt from one month carries over to the next, is added to, and then interest is compounded. One or two purchases here and there can easily become a mountain of debt over time, and creditors aren’t patient in asking for repayment.

5. Helping Others

Financial stress doesn’t only affect the person who is struggling to pay bills. Oftentimes their friends and family can be drawn into the situation as well. And it’s true that folks in the midlife years are often in the transitional space of helping their 20-something adult children while also helping to provide support–financial and otherwise–for their own aging parents. Using limited resources to help care for so many people often presents practical challenges, and likely cannot be sustained in the face of job loss, accident, or sudden and serious illness. So while both the younger and older generations are able to keep from filing for bankruptcy, the middle generation’s duty-bound generosity could bring them face to face with untenable debt. Once again it’s clear that bankruptcy’s root causes are many and varied and that each case is unique.

There are other commonly cited reasons for bankruptcy, but some, like student debt, aren't easy to clear. And knowing when or if you should file for bankruptcy can be hard to decipher, without knowing the ins and outs of the legal system. That’s why working with a trusted bankruptcy attorney is the best course.

Help Yourself Recover – Talk With an Ohio Bankruptcy Lawyer

When life takes you down a challenging financial path and bankruptcy seems like the only logical exit, you’ll need sound advice from a reliable advisor to help you along. You might prefer to put off the inevitable, but creditors won’t wait. 

Whatever the cause of your current financial stress, know that there is a way forward. At Hausen Law, you can work with an experienced chapter 7 bankruptcy lawyer who can help you to determine whether chapter 7 or chapter 13 bankruptcy is best in your situation. Reach out to speak with an expert–our Northeast Ohio Bankruptcy Attorneys will be happy to weigh in. James Hausen is proud to serve the Akron and Canton areas and is here to help the community.