5 Reasons People File for Bankruptcy

Bankruptcy is a legal process allowing those who can’t repay creditors to be relieved of some or all of their debts. The debtor often initiates the bankruptcy proceedings, and a court order imposes it. 

For some people, bankruptcy can be the answer to all their problems, even if the idea of starting from nothing is a bitter pill to swallow. However, it’s only natural to be curious about what events lead to bankruptcy. Often, it’s related to these situations below. 

Medical Expenses

While a personal injury attorney is often skilled at helping their clients receive settlements for serious accidents, medical expenses can stack up for those who don’t have insurance or cannot file claims. 

Despite the Affordable Care Act, over half of all bankruptcies in 2019 were due to medical issues, such as time off work to recover and high medical bills. Many Americans have health insurance, but job losses and high deductibles can mean they experience a significant shortfall. As a result, they might see bankruptcy as the only option after exhausting savings, retirement accounts, home equity, and education funds. 

Divorce

Divorce is not only emotionally challenging, but it can also be financially challenging. One household with one set of costs suddenly becomes two, and additional expenses like legal fees, child support, alimony, and the division of assets can lead to financial ruin in many situations. 

Even if one spouse is able to pay child support and alimony, they may lose their ability to pay their other bills. After exhausting all other income sources, their final option might be to file for bankruptcy. 

Finance Mismanagement

Financial responsibility is a learned skill in many respects, and not everyone understands the importance of living within their means. As a result, some people can end up in the uncomfortable position of owing a considerable amount of money to creditors with no way of making minimum payments. 

With no debt consolidation options at their disposal or loved ones to assist, they can see their only option as filing for bankruptcy. 

Business Failure

A number of situations can lead to the failure of a business and subsequent business bankruptcy, such as poor management, market downturn, a lack of capital or funding, or a faulty business model. 

Businesses have different bankruptcy options in these situations, such as Chapter 7 bankruptcy and Chapter 11 bankruptcy. Chapter 7 of the Business Code describes a company needing to stop all operations and go out of business. At this point, a trustee is appointed to liquidate assets, with the proceeds used to pay off debt. 

In contrast, a Chapter 11 bankruptcy involves a business needing time to restructure debt in the hopes that it can return to regular business in the future. 

Job Loss

Nearly two-thirds of Americans were living paycheck to paycheck in the wake of the COVID-19 pandemic, leaving them in a dangerous situation. If they were to lose their job or experience a drop in income suddenly, they might find themselves accumulating debt and unable to afford the necessities of life. 

If a new source of income cannot be secured and debt levels continue to rise, financial experts might recommend that businesses and individuals declare bankruptcy. 

Filing for bankruptcy is a last resort option for any company or person, but it can be a necessity for various reasons, such as the above. Talking to bankruptcy lawyers like Simon Fitzgerald Bankruptcy Lawyers might be a worthwhile option if you find yourself in any of these situations.