Facing bankruptcy is one of the most challenging times in your life. The number of people who have trouble paying their bills and are compelled to file for bankruptcy has dramatically increased during the last few decades. Through the legal process of bankruptcy, a person or business can be released from the burden of paying off their debts. You can petition the court for bankruptcy if your debts are out of control.
Many people and businesses consider bankruptcy a second chance at financial stability. However, if you are considering filing for Chapter 7 or Chapter 13 bankruptcy, knowing what can cause it and what steps you should take before making that decision is important. Listed below are common causes of bankruptcy:
Debt from student loans is a major problem that many Americans face. You could be tempted to overlook your college loans if you have a lot of debt and find it difficult to pay your bills. However, not making credit card payments and defaulting on student loans can have serious repercussions.
Additionally, because most student loans are guaranteed by the federal government, defaulting on the debt might completely upend your financial situation. You become a delinquent when your student loan is 90 days past due.
All credit bureaus will be informed of this fact and your credit rating may suffer severely. Your attempts to obtain credit may be rejected or approved at a high-interest rate once you are deemed a delinquent borrower.
You may occasionally require credit to pay off some debt and fund your costs. However, if the loans are rejected, your existing debts may mount and force you into bankruptcy. You could be classified as a defaulter if your student loan payments are past due for 270 days or more. In this situation, the organizations you owe money to will refer your account to collection agencies, which may take severe action.
There are several things you could do, though. For instance, having a positive attitude and being resourceful at work can help you maintain good relations with your boss. Additionally, you can increase your knowledge and abilities to increase your suitability for various roles.
Expensive Medical debt from a catastrophic illness
Medical debt is the biggest cause of bankruptcy in the USA. Medical expenses have been responsible for over 80% of all cases filed for bankruptcy protection each year looking at historical data. Also, 19% of households in the country struggle to cover their medical expenses and more homes cannot cater to healthcare costs.
It does not matter how much money you make or what kind of insurance coverage you have; you can still be affected by catastrophic illness or injury.
Even though the Affordable Care Act made obtaining both Medicaid and private insurance easier, medical problems still cause more than 60% of bankruptcies at this time. The new ACA policies, which rarely cover all costs, provide coverage to many medical debtors. Medical bankruptcies frequently occur for the following reasons:
- Medical bills.
- Prescription drug costs.
- Physician fees.
- Insurance premiums.
- Lost income due to illnesses.
The United States' severe issue with income inequality is made worse by the market-based healthcare system there.
A $500 unexpected hospital cost may be too much for many people. Such a bill necessitates borrowing money, paying it back gradually, or not paying it back. Many serious medical illnesses have deductibles that are far higher than $500. Most Americans with health insurance use all or almost all their money for medical bills.
Medical debt can still put you in danger, even with health insurance. The deductibles for insurance policies are frequently high, and even people with solid financial standing could become deeply indebted due to a few unanticipated medical emergencies, which could ultimately result in bankruptcy.
Another method to help you battle medical debt is structuring your emergency fund. Most people spend most, if not all, of their savings on medical expenses. The more money you have in savings, the more likely you are to be able to support your family and yourself in the event of a medical emergency. Do not assume that just because you have insurance, you are immune to medical debt; insurance does not protect you from the strain of high deductibles on your finances.
Going through a Divorce
Divorce can be expensive. It is not just the legal fees you must pay but also the cost of living in two separate households and the emotional stress it brings you. And, if you are lucky enough to obtain a high-quality divorce attorney, they will probably charge an arm and leg to settle your case.
Divorce can also cause financial stress, especially if one party is responsible for some portion of monthly expenses like mortgage payments. If you land a new job or lose your old one, you may be unable to pay those debts when they are due.
The distribution of assets can be postponed while the bankruptcy process is ongoing by filing for bankruptcy. However, bankruptcy does not halt divorce, custody, or support proceedings.
Most couples declare bankruptcy under Chapter 7. It eliminates qualified debt, outstanding invoices, and personal loans without a repayment strategy. Another benefit is that the entire procedure takes three to four months, which is a pleasant alternative given how contentious divorces can be.
You can choose the assets you need while choosing to liquidate the ones you do not wish to keep under Chapter 7 bankruptcy.
Unexpected Emergencies and Expenses
Some people may go bankrupt due to property loss brought on by theft or natural disasters like earthquakes, hurricanes, or tornadoes. Likely, some homeowners are unaware that certain events, including earthquakes, require separate insurance coverage.
Anyone without coverage for such a disaster runs the danger of losing their house and most, if not all, of their possessions. They have to locate essentials later and pay for a replacement for these items. Even though it's uncommon, individuals who lose their clothing in such catastrophes would not be able to dress appropriately for their jobs, which could jeopardize their positions.
Other unforeseen costs could throw you off, hampering your monthly expenses or delaying crucial goals, such as big medical bills or extensive house maintenance and repairs. A little forethought and preparation in the form of planned savings could go a long way.
An emergency fund may help you survive when unanticipated costs exceed your normal spending plan. No set amount should be set aside for emergencies. As a rule, save at least three months' monthly expenses.
You are not required to set aside this amount of cash immediately. As with other financial objectives, the idea is to concentrate on setting aside small sums regularly - amounts that you can afford each month, and that will eventually add up to your objectives.
Credit Card Debt and Dependence
The use of multiple credit cards is not unusual. According to Experian's 2019 Consumer Credit Report, the average American has four credit cards and a $6,000 credit card balance. Although using these credit cards responsibly is entirely possible, it is also very simple to fall into bad habits like carrying a balance, making impulsive purchases, engaging in shopping therapy, or even forgetting how and where frequent credit transactions were made.
This could result in decisions to pay off one credit card debt with another, skip payments, make minimum payments, and other similar behaviors. Each of these behaviors comes with serious repercussions in terms of fees, charges, and fines, which makes the issue worse. Paying off credit card debts and other unsecured debts without assistance is difficult.
What is the best course of action here? Do not wait until filing for bankruptcy is an option to let credit card obligations accumulate. Make timely payments and only spend what you can afford to repay. If you have a significant credit card debt, remember that you can surely pay it off and that many people with debts of over $100,000 have done so. One of the most effective ways to eliminate debt is to pay off any high-interest bills first. Twenty percent or higher credit card interest is far more expensive than 5 percent mortgage or auto loan interest.
Job Loss or Pay Cut
Many Americans struggle to make ends meet. Bankruptcy is often accompanied by income loss and a loss of employment. Few people can afford the luxury of having a six-month emergency fund. You will have an emergency if your income is reduced or eliminated. It will be difficult to pay your debts on time, and the creditors might not be interested in your justification for not doing so. There are no longer any alternative ways to avoid bankruptcy if you lose your work unexpectedly.
Timing is everything when you are about to go bankrupt because of a job loss. Chapter 7 bankruptcy may help you escape your financial circumstances when you lose your job. Your dischargeable debt (i.e., credit card debt, medical debt, etc.) will be forgiven if you file for a Chapter 7 bankruptcy, which is the liquidation chapter. The best course of action might be to file for bankruptcy if you have few assets and a poor income. All other outstanding debt will be erased if your non-exempt property is liquidated to pay your creditors.
You are more likely to be eligible for liquidation bankruptcy (chapter 7) if you lose your job or see a decline in your income. It could be challenging to satisfy the means test for Chapter 7 bankruptcy if you lost a well-paying work in the last six months. It might be prudent to postpone filing or do so under Chapter 13. The drawback of declaring chapter 13 bankruptcy after losing your job is that you will need to quickly locate a new job to keep up with the debt repayment schedule.
Foreclosure Could Make You File for Bankruptcy
The most common method of financing a real estate transaction is to borrow money from a bank or a mortgage business to pay for part of the purchase. Homeowners who borrow against the value of their homes typically do so through second mortgages or home equity loans.
In both situations, the creditor will probably file a claim on the property to secure the unpaid debt and protect their interest. When a borrower does not make loan payments on time, the creditor may act quickly and compel the sale of that home to recoup the unpaid loan balances. Foreclosure takes over a property when the owner has fallen behind on payments.
To help them keep their homes, couples who do not want to lose them frequently file for bankruptcy. If you are not too far behind on your payments, you might be qualified for a repayment schedule. You can catch up on missed payments while making regular installments according to a repayment schedule. For this strategy to work, your income must cover your present bills and the repayment plan amount. This type of bankruptcy is known as a Chapter 13 bankruptcy.
Taxes are just one of many reasons people file for bankruptcy. The procedures for paying taxes are more complicated than those for paying other types of debt. It is, however, conceivable. Chapters 7 and 13 both provide a way to carry this out.
The majority of tax debts are classified as priority claims in bankruptcy proceedings. It implies that to relieve your tax burden through bankruptcy successfully, the tax bill must be paid as a whole. You can have secured or unsecured tax debt.
The IRS will place a lien on your property to secure unpaid taxes. If you owe taxes for a given tax year and the obligation is secured, the IRS now has a lien on your property.
The majority of unsecured tax obligations will be discharged if you qualify based on certain rules. Whether the debt is eligible for discharge will depend on when you start making the payments as well as other elements, such as the following:
- If you submitted your tax returns at least 2 years ago.
- You did not file your returns fraudulently.
- Your debt dates back more than three years.
- 240 days have passed since your tax obligation was last assessed.
- Payroll tax is not what you owe but the federal income tax. A portion of one's income is paid as income taxes to the state or the federal government. On the other hand, payroll taxes are sums of money deducted from an employee's pay by their employer and paid to the government on their behalf. Payroll taxes primarily fund Medicare and social security. When processing payroll, employers deduct both.
You must adhere to all deadlines when dealing with income tax, including those for your prior tax returns. They will have an impact on whether you qualify for a tax discharge.
Find a Competent Modesto Bankruptcy Lawyer Near Me
Do not hesitate to speak with a competent bankruptcy attorney when you believe you have run out of options financially. At Modesto Bankruptcy Attorneys, we could assist you in filing for either Chapter 7 or Chapter 13. We will walk you through the entire procedure if you consider filing for any of the reasons mentioned above.
Despite the myth surrounding bankruptcies, it is recommended to receive our guidance since we will enable you to make an informed choice regarding bankruptcy. Call us at 209-314-3010 to schedule a cost-free consultation with our attorneys if you believe you are on the verge of filing for bankruptcy.