Although bankruptcy can be caused by frivolous spending and lavish lifestyles, that’s not always the main reason why it occurs. According to the San Fransisco Chronicle, there are five main life events and changes that can make you much more likely to file bankruptcy.
1. Medical Expenses
A Harvard University study says this is the biggest cause of bankruptcy. Sixty-two percent of all personal bankruptcies are filed because of huge medical debt. And surprisingly, the study also showed that 78% of those who had to file bankruptcy because of medical debt had insurance.
2. Job Loss
Millions of Americans are unemployed which puts them at a greater risk for filing bankruptcy. Job loss is a big cause for bankruptcy because often people who don’t have emergency funds live off credit cards while they are unemployed. Also, when people aren’t employed they may start paying for insurance themselves which is a bigger financial drain at a time when their income has ceased.
3. Uncontrolled Spending
Out of control credit card bills, huge mortgages and expensive car payments can force bankruptcy as well. If borrowers are unable to make the minimum payments they may find that only way out of their situation is by filing for bankruptcy. While some solutions like debt consolidation and home equity loans may offer temporary relief, they often still end up in bankruptcy. Robert Lawless, professor of law at the University of Illinois told USA Today that home equity loans may have worked before the housing crisis, but now that’s not an option for many homeowners. “People have borrowed money to avoid filing for bankruptcy,” says Lawless. “When consumer credit tightens up, as we’ve seen, that does increase the (bankruptcy) filing rate.”
Ending a marriage is costly in many ways. From legal fees to child support and alimony, plus the added burden for maintaining a household on just one income can cause incredible financial strain. Earning power may also go down while dealing with the emotional stress of a divorce. All of these factors can commonly lead to bankruptcy.
5. Unexpected Disaster
Even if you have an emergency fund, it can be difficult, or almost impossible, to prepare for natural disasters like earthquakes, flooding or hurricanes. These events can lead to bankruptcy, especially if the homeowner doesn’t have insurance. Not only can these catastrophe cost them their homes, but they can also lose their jobs due to loss of stability.
Bankruptcy filings were up 32% in 2008, according to the Administrative Office of the US Courts. There were 1.47 million bankruptcies last year and Samuel Gerdano, executive director of the American Bankruptcy Institute tells USA Today he expects even more this year. “We are already on a faster pace in 2010 than we were a year ago,” Gerdano says. “Consumer filings will likely surpass 1.5 million filings this year.”
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