What Are The Top 5 Reasons People file for Bankruptcy Relief?
In the United States, more than 930,000 bankruptcies were filed in 2014. This represents a slight decrease from 2013, when more than one million people filed. The large majority of these filings were under Chapter 7, commonly referred to as “liquidation.” Since the Debtor is entitled to claim certain exemptions, most cases are “no asset” cases where the Debtor receives a discharge and none of his or her assets are liquidated. Although everyone’s reasons for personal financial distress are different, there are some common reasons people seek bankruptcy protection. Here are some of the common reasons people cite for needing bankruptcy relief.
Uninsured and Unexpected Medical Expenses
Historically, uninsured medical bills, and other related medical expenses are cited as the most common reason for a Chapter 7, and that is still the case today. If a person is uninsured and suffers a serious illness, medical bills add up quickly. It isn’t unusual for someone hospitalized for an extended length of time to incur expenses of $50,000 or more. For severe accidents, the medical flight expenses are thousands of dollars, if not tens of thousands of dollars. For those on a moderate income, medical bills that high become insurmountable.
Loss of Employment or Other Decreases In Income
Most working Americans budget properly and spend wisely and are able to manage with two incomes until an unexpected calamity occurs which causes budget deficits. For example, when the primary wage earner loses their job, or finds out their overtime is ending or their pay is being decreased, can not over come the financial hardship associated with that and the setback caused by the loss of income and increased expenses. Moreover, with aging americans, finding comparable employment often takes months and may never happen, especially if the person is close to retirement age. In the meantime and in order to survive, people often are underemployed for their skills and or find themselves trying to manage on unemployment which is generally only a small portion of their normal income.
Unfortunately, with most families today, the monthly expenses for the house rent or mortgage, the car payments, the student loan payments, and utilities are payments that can not be missed and are a set amount, which are greater per month than the income to the household. Since the income has gone down and the expense are the same or greater if medical issues are involved, the budget deficit becomes so great that bankruptcy is really the only option for the families survival financially and socially as a result.
Divorce, Dissolution or Death of a Spouse
Divorce or dissolution, legal separation or the death of a spouse are other primary reasons that people cite for needing to file bankruptcy. And the reason is simple. Two incomes were needed to support one household or family and the normal monthly living expenses, but after death, divorce or dissolution, only one income is available to support the same household. Furthermore, in divorce, there are now two houses to support, so the budget deficit is exposed.
Tax Issues and Garnishments
Tax debts resulting in collection efforts such as Liens or Levies are another common reason people file for chapter 7 and/or chapter 13 bankruptcy, as well as a court ordered garnishment of their wages through their employer to pay an unpaid judgment. This is typically at least 25% of the person’s net take home pay which is diverted to debt payment involuntarily. Although recently owed or incurred taxes are not discharged, or forgiven in a Chapter 7, a person can pay them back over time in a chapter 13 reorganization and all collection efforts cease while the case is pending. If a person has a large tax problem and the IRS is collecting the debt, the garnishment or seizure diverts monthly income normally used to pay other monthly living expenses and payments, such as mortgage and car payments. Filing for bankruptcy relief stops all collection efforts immediately regardless of who is collecting, and it is a great way to stop involuntary collection efforts by aggressive debt collectors, including the IRS.
Overspending and Accumulated Credit Card Debt
Credit card debt remains relatively easy to obtain and are often used to pay monthly living expenses when people are suffering income issues such as unexpected medical illness causing bills and loss of income from work. However, they accumulate quickly and are difficult to overcome and pay off. When people carry four or five credit cards, each with a line of credit of several thousand dollars, the accumulating debt can sneak up on a person. Usually, the debt grows gradually over a period of years. Making minimum payments will not pay down the debt for many years. Often without realizing it, the person has put themselves in a position they cannot overcome. Bankruptcy offers light at the end of the tunnel and an opportunity to get that needed fresh start and overcome their financial predicament through bankruptcy relief.