What Are the Common Reasons Why People File for Bankruptcy?

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People file for bankruptcy to get out of a serious debt problem they have. Having serious amounts of debt isn’t just a circumstance that happens without causes. It can come from a consequence of an action or an unavoidable circumstance. Whatever the reasons, bankruptcy is the go-to solution when people have exhausted other options and when their finances are out of control. Filing for bankruptcy can be a big decision so it helps to have the assistance of a Kentucky bankruptcy attorney for the process. 

Divorce or Separation  

Divorce can be traumatic not just personally, but also financially. When a household is split, the income is divided, and expenses increase. If both individuals or either party aren’t able to pay their debts, it can be hard to control expenses that happen. Splitting apart the income of two isn’t usually an easy situation. Legal costs can often be enough to have to file for bankruptcy and wage garnishments to cover alimony or child support can also cause people to not be able to pay the rest of their bills. 

Medical Problems

Injury and illness aren’t usually an expected situation but even with health insurance, copays and high deductibles can wreak havoc on finances. Serious diseases or injuries can lead to hundreds of thousands of dollars in bills and this is enough to wipe out home equity, retirement accounts, and savings. Once these other financial resources have been exhausted then bankruptcy may be the only other option. 

Job Loss or Pay Cuts

Whether it’s due to resignation, termination, or a layoff, loss of income from a job can be devastating. Some may get severance packages, but others get fired without any notice. Not having an emergency fund can make a job loss even more devastating and people turn to credit cards to pay bills. The loss of insurance coverage can also drain limited resources. Those who aren’t able to find similar employment after a period of time may not be able to recover from the lack of income or be able to keep creditors happy. Even if it’s not a complete job loss, a loss of significant income with pay cuts can often be enough to have someone rack up extensive debt, especially if they are already stretched thin and living above their means. 

Excessive or Poor Use of Credit

Some people aren’t able to control their spending. Loan payments and credit card bills will eventually spiral out of control until the borrower isn’t able to make the minimum payment. When a borrower can’t get funds from family or friends or get a debt consolidation loan, bankruptcy is usually the only option. Many debt consolidation plans fail for a number of different reasons and these plans typically just delay bankruptcy filing. Home equity loans may sometimes be a good idea to pay off some unsecured debt, but once these loans are exhausted then borrowers face foreclosure on their homes if they aren’t able to make the payments. Some people are just not good with finances.

Student Loan debt

College loans can also cause financial problems for younger individuals, especially after the grace period for repayment has ended. Unfortunately, filing for bankruptcy doesn’t reduce or eliminate student loan debt, except in some rare cases of hardship. However, it’s the constant presence of this very large debt that causes people to rack up other debt that can be discharged with bankruptcy and then file for bankruptcy knowing they still have to make good on student loans. 

Unexpected Expenses

Loss of property due to earthquakes, tornados, theft, or other casualty can force some people into bankruptcy, especially if there isn’t any insurance or not enough insurance. For example, homeowners need to take out separate coverage in order to be covered from certain events, such as earthquakes or floods. Those that don’t have this type of coverage can face the loss of their home and their possessions. They will need to replace these items and also find shelter and food in the meantime. 

Why Businesses File for Bankruptcy

Businesses also have different reasons why they file for bankruptcy. Market conditions can be to blame, especially for companies that are in specific niche markets and are subject to shifting customer preferences. Financing is also a big challenge for many small businesses and owners take out loans to help with operations. If they aren’t able to get additional funding, then it can lead to bankruptcy. Lack of planning and poor decision making can also lead to business failure and bankruptcy. 

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