What Are the Most Common Reasons Individuals File for Bankruptcy?

Many people know that filing for bankruptcy can impact their lives for years. However, it is often the best way out of a bad financial situation. But why do most people declare bankruptcy in the first place? This post covers eight common reasons individuals file for bankruptcy. 

1. Loss of Income

Whether purchasing a car, deciding where to live, or choosing a college for your child, you base many financial decisions on your household income. Losing your job can upend everything. 

If you’re one of the majority of Americans who live paycheck to paycheck, you may quickly start going into debt to pay your bills. Job loss often comes with a loss of insurance coverage, which can increase your expenses even more. Bankruptcy may be your only option for financial recovery.

2. Divorce

Just like job loss, divorce can change your entire financial outlook. You may lose your second household income, need a new place to live, and have to hire a lawyer. If you end up paying child support or alimony, receiving insufficient child support from your ex, or being responsible for joint debt, you may find yourself in financial trouble. 

3. Medical Expenses

Unfortunately, an illness or injury can lead to thousands (or hundreds of thousands) of dollars in medical bills. Even if you have a savings buffer, it can quickly be depleted. If you have no health insurance, can’t get insurance due to a pre-existing condition, or face an unexpected catastrophic injury or illness — even with insurance — bankruptcy may be the only way out of medical debt.

4. Expensive Emergencies

Medical problems are only one kind of emergency that can strain your finances. A car crash, a house fire, or serious flooding can cause property damage you can’t afford to fix. While many people have auto, homeowner’s, or renter’s insurance, not all risks and costs are covered. 

You may also face significant unexpected expenses from a number of life events: a death in the family, a pet’s surgery, an HVAC replacement, or even a lawsuit. Any one of these expenses could strain your finances and force you to declare bankruptcy. 

5. Overspending

While perhaps not as common a cause as many assume, simple overspending is sometimes the reason for bankruptcy. Credit cards make it easy to spend money you don’t have. Without proper financial planning, some people make unnecessary purchases they can’t afford. Once you start missing minimum monthly credit card payments, debt can spiral out of control.

Other people spend exactly what they make, leaving nothing for savings. In that case, a single major unexpected expense can begin a financial decline that ends in bankruptcy.

6. Unaffordable Mortgages

For many families, mortgages make up the largest percentage of household debt. Some lenders even approve home loans for people who cannot afford them. In other cases, adjustable-rate mortgages cause payments to spike when interest rates rise — sometimes years after the original loan.

Defaulting on a mortgage can cause the homeowner to lose their home and any equity they may have accumulated. People often file for bankruptcy when they cannot afford their mortgage payments.

7. Other Debt

Although mortgages typically represent the biggest portion of household debt, they are not the only kind. Many individuals declare bankruptcy because they face overwhelming debt from one or a combination of the following types:

• Student loans
• Auto loans
• Credit card charges
• Collection agency accounts
• Past-due rent payments
• Utility arrears
• Civil court judgments
• Auto accident claims
• Unpaid taxes
• Home equity loans
• Debt consolidation plans

While bankruptcy cannot discharge every debt, it can eliminate many kinds. Choosing the right bankruptcy type is essential, as they resolve different debt problems.

8. Helping Friends and Relatives

People sometimes go into debt providing financial assistance to others. Caring for an elderly parent, financially supporting adult children, or helping a friend in an emergency can all drain financial reserves.

Some people find it hard to say no to people in need, while others may consider helping family members an essential part of their household expenses. In either case, assisting others financially can lead to a situation where you may need to declare bankruptcy.

Need Help With a Bankruptcy in NC?

If you’re in serious financial trouble, a bankruptcy attorney can help you regain control of your finances. At Biggs Law Firm, we guide businesses and individuals through the bankruptcy process. We work with you to understand your needs and develop a personalized debt relief plan. Call us today at (919) 568-3454 or contact us online to schedule a consultation with an experienced bankruptcy lawyer in Raleigh, NC.