Why Do People Go Bankrupt?
Filing for bankruptcy can be considered the worst possible scenario for an individual and their family. The number of bankruptcies is alarming, with a tremendous increase in recent years. This has led to Congress enforcing certain conditions that make it harder for people to declare bankruptcy.
One of the biggest causes of bankruptcy in the US is medical issues. Big mortgages, poor use of credit, and unexpected emergencies are some other reasons why people go bankrupt. In this article we will explore each of them in detail.
There is no way we can consider medical treatment optional. Healthcare comes at a cost, which makes medical expenses one of the common reasons for bankruptcy.
A recent Harvard University study shows most bankruptcies are caused by medical debts that individuals cannot afford to pay back. The study revealed that 62% of all personal bankruptcies arise out of medical expenses. The study also revealed some other interesting figures: 78% of the filers had some form of health insurance, which clarified that medical bills do not affect only the uninsured.
Illnesses and injuries can lead to medical bills for thousands of dollars. Without fully covered insurance, the money for these bills naturally comes from savings or retirement accounts, home equity, etc.
Once these savings are exhausted, and all credit options are closed off, there is no option for individuals but to go bankrupt.
Poor Use Of Credit
It is fair to say that some people struggle to control their spending. This can lead to mortgages, auto loans, and credit card debts spiraling out of control. It does not take much for a borrower to reach a point where even making a minimum monthly payment towards each debt becomes difficult.
When alternatives like debt consolidation loans or help from family and friends are not a possibility, bankruptcy becomes unavoidable. Statistics reveal that many debt consolidation plans fail, which leads to a delay in the filing of inevitable bankruptcies.
Though home equity loans are a suitable option for paying off unsecured debts, they are not fool-proof. Once the equity is exhausted, and borrowers cannot make this payment as well, there is every possibility of them facing foreclosure on their homes.
Credit card debts are another concern, as they can easily snowball out of control. When you owe more than what you can repay, it is tempting to make only minimum payments. But it will only drag the debt over a longer period, and you will end up paying much more in interest.
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Earthquakes, floods, and tornadoes are inevitable natural disasters over which no one has control. Sometimes, loss of property or funds, because of theft or fraud, can also be a cause that leads to people filing for bankruptcy.
Unfortunately, many homeowners do not take coverage for their assets in case of natural disasters like earthquakes or tornadoes. These disasters destroy properties and belongings as well. Besides finding food and shelter to survive, for the time being, the affected also need to pay to replace the damaged assets. The cost and timelines to rebuild a homeme or find alternative accommodation can be very taxing.
Filing for bankruptcy becomes unavoidable in such circumstances. People’s mental health and wellbeing are also at risk of being affected, leading to further problems.
Low Earnings vs Expenditure
This is one of the most common reasons why people file for bankruptcy. There is a lot of money that is going out, but not enough is coming in to compensate for it. However, controlling this situation is possible, and is in your hands. Building and maintaining an emergency fund is something you must consider.
People have several reasons for overspending that lead them to declare bankruptcy. However, before the situation becomes inevitable, you should follow several measures to prevent the situation. Take financial planning seriously and create monthly budgets based on your income and fixed expenditure. Only then can you understand how much spare cash you have to spend on other things.
Financial planners and credit counselors can help people plan their finances wisely to avoid bankruptcy.
In this article we have covered some of the major reasons why people file for bankruptcy, but there are many other reasons as well. Reasons like poor use of credit and overspending are very much the responsibility of individuals.
By spending wisely and borrowing according to the requirements, it is possible to avoid bankruptcy. It is essential to follow good credit practices and repay debts on time before they spiral out of control.
Filing bankruptcy can adversely affect your credit score and also have a bad impact on other areas of your life. It can become very difficult to borrow various installment loans in the future, whether to purchase property or vehicles.