There are many misconceptions as to why people declare bankruptcy. For starters, filing for bankruptcy is anything but an easy decision for folks. As just about any bankruptcy lawyer will tell you, the vast majority of people dread declaring bankruptcy. This is not a decision people choose to make, but rather one they have resigned themselves to make. How do I know this to be true? Because my clients have repeatedly told me this. When they recount their stories and what has led them to their financial difficulties, I see the pain and shame in their faces and hear the heartbreak in their voices. Declaring bankruptcy is a very difficult decision to make for them.
Another misconception that you frequently encounter is that “these people are working the system,” as if they have planned their bankruptcy filing for months, if not years. My clients have desperately tried everything in their power to avoid filing for bankruptcy. They have called their credit card companies to try to work out a payment plan, they have tried credit counseling with Money Management or some other company, they have cleaned out their retirement accounts, they have moved in with their parents or some other relative. In short, my clients have done everything under the sun to avoid having to sit in my office chair and declare bankruptcy.
Finally, as for the assertion that “these people” simply do not know how to mange their money and live within their means, I can assure you, trips to Europe or shopping sprees is not what is leading the vast majority of my clients to file for bankruptcy. Yes, of course, there is always the “rotten apple,” the individual who takes advantage of the system, but for the other 90%, the following are the real reasons that push people into declaring bankruptcy.
Illness or disability – If you have managed to make it through your entire career without being seriously injured for a prolonged period of time or permanently disabled to the point that you can no longer perform most jobs, then consider yourself lucky. By the time your Social Security disability income finally kicks in, you will be fortunate to receive half of your previous salary, making it nearly impossible to survive.
Unemployment – Unless you have been living under a rock, you know that the unemployment rate is pretty darn high these days. Been out of work for 1.5 years like my father was a couple of decades ago, and well, it becomes pretty hard to pay your bills. And even then, people will usually avoid filing for bankruptcy, will rejoin the workforce and will try to climb out of the hole. Problem is, at some point, it becomes the point of no return. It becomes nearly impossible to pay off $30,000 in credit card debt at 20% APR when all you are making is $60,000 per year.
Divorce – I would say that about one third of my clients have divorced within five years prior to arriving in my office or are in the midst of divorcing. The ramifications of divorce are not always instantly felt. However, the fact of the matter is, for most people (women in particular), the writing is already on the wall. With no alimony, kids to raise, and a merely a decent pay check, these newly divorced folks become more and more dependent on credit cards, pay day loans, car title loans, and personal loans. Eventually, the music stops.
Failed businesses – Once the government contracts dry up or the economy slows down, the LLC or Corporation begins to fail. Unfortunately, some individuals go down with their sinking ship. Business owners have guaranteed personal loans or have used their personal credit cards in a desperate attempt to save their business. As the business is no longer profitable and the debt begins to mount, creditors begin to pursue these folks personally and bankruptcy is typically the only way out.
Underemployment – People like to talk a lot about unemployment numbers, but I think the statistic that hides in the shadows and is often overlooked is the fact that millions of people in this country, particularly those living in more expensive parts of the country like Alexandria, VA and Fairfax, VA, simply do not earn enough money. They can barely cover their bills, but when it comes to anything “extra,” like a trip to the dentist, the basement floods, or the car has to be taken to the mechanic for major repairs, there simply is not enough money in the bank. That is when credit cards and personal loans become relied upon out of mere necessity. This typically goes on for years as the individual faithfully pays at least the minimum balance each month. Eventually, the amount of debt becomes insurmountable and the only way to escape is to file for bankruptcy.
We need to stop referring to people who have filed for bankruptcy as “deadbeats.” It not only demonstrates insensitivity, but also a great deal of ignorance as to why people declare bankruptcy in the first place. So, my advice is “judge not, lest you be judged.”
10 Replies to “Why People Declare Bankruptcy?”
I’ve been in the health care business for 30 years and I definitely have noticed an uptick in failed businesses. Most are still making money but not enough. They live beyond their means and then you know what happens.
Bankrupty can be caused by each one of the items listed, including a combination thereof.
quite a concerning issue it is..however the discussed reasons are the root factor of bankruptcy…though even any one of them can also bring about the tragedy
I agree with the reasons you described. Prof. Elizabeth Warren’s study found the “Big Three Reasons” — job loss, medical problems, and divorce or separation accounted for 87% of bankruptcies.
Job loss accounts for much of the self employment and underemployment. If you are interested in Professor Warren’s study, I recommend The Two Income Trap. I practiced bankruptcy law for over a decade and have grown convinced that approximately one third of the bankruptcies are unnecessary, especially in the 18 states where the law allows debtors who prevail to shift their attorney’s fees to the non-prevailing creditor or debt buyer who sued them. Far too many consumers file bankruptcy because of the debt collector phone calls, harassment, or calls to third parties. Low income consumers and consumers who have not reversed the “root cause” of their bankruptcy should consider fighting (suing) the debt collectors who are harassing them in order to enforce their rights under the Fair Debt Collection Practices Act (“FDCPA”). Higher income consumers who have cured the root causes of their bankruptcy are the best candidates for a bankruptcy.
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