Bankruptcy is a last resort for many Americans caught in difficult financial situations involving heavy, spiraling debt. It can be a good option for a fresh start, but it comes with major drawbacks. Here are 18 of the most common reasons why people go bankrupt.
Medical Expenses
The high costs of medical treatments, often unexpected, are systematically pushing Americans into debt. The Texas Tribune reported in 2022 that “100 million people in America are saddled with medical debt” and that 17% of those indebted adults declared bankruptcy or lost their homes.
Job Loss
Sudden unemployment, from layoffs, structural changes, and firings, disrupts financial stability, especially for those living paycheck-to-paycheck. Severance pay is often insufficient to cover long-term unemployment periods, and many Americans find themselves struggling to pay for food, rent or mortgage payments, and utility bills, so they declare bankruptcy.
Poor Financial Planning
A lack of budgeting and inadequate savings can make individuals, especially those with lower incomes, unprepared for unexpected expenses. Failing to plan for future expenses like education and retirement can also lead to debt and potential bankruptcy.
Unexpected Expenses
Emergencies, like car breakdowns and home fires, can quickly deplete savings. Those without emergency funds may resort to high-interest loans, like payday loans or credit cards, to pay for these unexpected events. Insurance often only covers some expenses, leading to significant out-of-pocket costs.
Addiction
Addiction to gambling, drugs, and alcohol often leads to compulsive spending and significant financial problems. Addiction can also lead Americans to lose their jobs, which further exacerbates financial difficulties, and spending on addiction recovery will also strain finances.
Failure to Pay Taxes
Owing back taxes and current taxes to the government can lead to penalties of up to 25% of the unpaid taxes. Individuals and businesses alike can find themselves unable to pay off their tax debt and the interest accrued, leading to bankruptcy.
Bad Real Estate Investments
Investing in real estate is potentially an effective method of diversifying a portfolio and earning extra money. However, investing without doing proper research or at the wrong time in the market can lead to significant financial losses, with mortgage payments on properties that have lost value.
Student Loans
BBC News recently reported that “an estimated 250,000 people with student loans file for bankruptcy in the U.S. each year.” The Biden administration has made it easier for Americans to free themselves of student debt by filing for bankruptcy. Under the new guidelines, around 100,000 students annually “could be eligible for some student debt relief.”
Utility Bills
Utility bills are often high during the winter and can become unmanageable for poorly insulated homes or fixed-income households. Utility shut-offs can also lead to further expenses, including motel stays and reestablishing service costs.
Excessive Use of Credit
Excessively relying on credit cards for everyday expenses can lead Americans to struggle with high levels of unmanageable debt. High interest rates and minimum payments can cause debt to become a cycle of borrowing and repayment that’s difficult to escape. Debt.org reports that 60% of Americans who file for bankruptcy and earn under $30,000 struggle with an average credit card debt of $5,400.
Overspending
Many Americans spend more as they earn more, but many find themselves living beyond their means. Luxury purchases, expensive vacations, and a generally high-cost lifestyle see some people accumulate debt faster than they can repay it.
Medical Insurance Gaps
High deductibles, co-pays, and non-covered treatments can create financial hardship, even for Americans with insurance. Changes in policies or a loss of coverage can also suddenly expose individuals to high medical costs they cannot afford.
Divorce
Legal fees, alimony, child support, and the division of assets during a divorce can financially strain both parties and cause them to file for bankruptcy to cope. Justia notes that some couples file for bankruptcy before their divorce to get a joint petition. In other cases, one spouse struggles with their financial files separately, and others wait “until after the divorce because the reduction in their income may make it easier to pass the means test and file under Chapter 7.”
Credit Scams and Fraud
In 2021, almost 24 million Americans, or 9% of the population aged 16 or older, fell victim to identity theft. These Americans often find themselves responsible for debts they did not incur, and the legal and financial process of resolving fraud can be costly and time-consuming.
Decline in Property Value
If property values in their area fall, homeowners may find themselves owing more in mortgage payments than their property is worth. Declining property values can also negatively impact Americans’ ability to refinance or secure home equity loans for debt consolidation.
Natural Disasters
As the climate changes, natural disasters occur more frequently. Wildfires, hurricanes, and floods can lead to the loss of both income and property, and insurance does not always cover the full extent of damages. Rebuilding or repairing damaged property is often significantly more expensive than anticipated, leading to financial strain.
Lack of Insurance
Insurance is a vital financial safety net for unexpected events. Not having adequate home, auto, or life insurance can result in significant economic losses when these unexpected events occur. For example, the cost of replacing or repairing property out-of-pocket can be prohibitive and lead Americans to spiral into debt and eventually bankruptcy.
Business Failure
USA Link System points to data from the Bureau of Labor Statistics that reveals 20% of small businesses “fail within their first year,” with the failure rate increasing to 30% by the second year, 50% after five years, and 70% after a decade. The repayments of loans taken on establishing small businesses and the expenses of running the business can lead small business owners to declare bankruptcy.
Up Next: You’re a Genuine 70s Kid If You Can Remember These 18 Things
Life was very different in the ‘70s. It was a simpler era when children played until the sun went down, with much less fear than today! If you’re looking for some nostalgia, here are 18 things that you will only remember if you grew up in the ’70s.
YOU’RE A GENUINE 70S KID IF YOU CAN REMEMBER THESE 18 THINGS
17 Signs Someone Has a High IQ
Intelligence is far from linear, determined by a wealth of factors extending beyond academic prowess and supposed good grades. However, despite the complexities of intelligence, there are a few telltale signs that people with high IQs tend to possess. Here are 17 of them.
17 SIGNS SOMEONE HAS A HIGH IQ
19 Common Behaviors of Highly Intelligent People
Highly intelligent people tend to be complex individuals with multiple unique behavioral traits in their personalities. Some are easy to spot, and some are more nuanced, but regardless, here are 19 common behaviors that highly intelligent people will often exhibit.