Though many people assume that bankruptcy is caused by uncontrolled spending or poor financial habits, studies have shown that this is not true. The majority of bankruptcies are caused by circumstances outside of the person’s control. Though every person’s case is unique, there are some common factors that contribute to the decision to file bankruptcy. Below is a brief overview of the top causes of personal bankruptcy in the United States
#1 Medical Expenses
Studies over the past few years indicate that medical expenses account for 42% – 62% of personal bankruptcy filings. Often, these expenses come from unexpected injuries or illnesses that result in high medical bills that can quickly deplete savings, retirement accounts, home equity, and other assets. Even more surprising, the majority of those who file bankruptcy due to medical expenses had health insurance, but the coverage was not sufficient or the out-of-pocket expenses were higher than they could afford.
#2 Job Loss
Approximately 22% of those who file bankruptcy do so because they were laid off, fired, or chose to leave their job. With the recent economic downturn, the average job search now lasts more than 7 months, leaving many families without income for longer than their savings can cover. Unfortunately, many people turn to credit cards and other means of debt to pay bills, which only increases their debt load.
#3 Excessive Debt
Buying a large house with a high mortgage payment, buying expensive new cars, using credit cards to pay bills and necessities, and spending too much can quickly lead an individual or family into a situation of having more debt than they can afford to pay off. Sometimes this is a result of unforeseen circumstances, other times it is simply poor financial planning.
#4 Divorce or Separation
In addition to being an emotionally difficult decision, divorce can also be financially difficult with its attendant legal fees, child support payments, and other expenses. Life after the divorce can also be difficult as spouses struggle to provide for a household on one income.
#5 Unexpected Disasters
From personal events like the death of a family member to wide-spread catastrophes like an earthquake or other natural disaster, about 7% of bankruptcies result in events that are unpredictable and unexpected.
In many cases, sound financial planning and preparing for emergencies can help avoid bankruptcy. But sometimes, due to circumstances out of a person’s control, bankruptcy becomes the best option to regain control of finances and get out of debt. If you find yourself in one of these situations and are considering bankruptcy, talk to one of our bankruptcy attorneys today to learn more about your options.