"Money makes the world go round", they say, but what happens when the money runs out? For many, the answer is bankruptcy. It is a word that no one wants to hear, but one that is becoming increasingly common in California. The number of people filing for bankruptcy will be steadily increasing over the coming years, experts say.

While it is easy to assume that overspending and financial mismanagement are major culprits, the reasons for bankruptcy are often more complex than that. More than 1.5 million Americans file for bankruptcy each year, according to US bankruptcy court data.

Most significantly, people rather than organizations file for bankruptcy in approximately 97 percent of cases. In this blog, you learn common reasons why people go bankrupt and expound on this complex and often misunderstood issue.

Loss of Employment

Losing a job is a devastating event that can wreak havoc on a person's life in many ways. Aside from the emotional and psychological toll, losing a job can also have severe financial consequences, leading many to file for bankruptcy.

According to a study conducted from 2014 to 2016, losing a job was the major reason for filing for bankruptcy. Statistics show that approximately 80% of the survey respondents cited employment loss.

You plunge into financial turmoil when you have no source of income.

Unfortunately, not many people have savings to cater to their bills for more than three months. According to a 2019 report by the Federal Reserve, 40% of Americans do not have the money to cover an unexpected expense of just $400. Even a short period of unemployment can quickly put people in a precarious financial position.

The loss of income is only the beginning of the financial struggles for those who lose their jobs. They also face the loss of insurance coverage and the cost of COBRA insurance, which can quickly drain already limited resources. Finding similar employment can also be difficult, especially during economic downturns, which can leave individuals without income for an extended period. This can make it difficult to recover from the lack of income and keep creditors at bay.

Moreover, a job loss could result in losing health insurance, leaving you vulnerable to huge medical expenses unless you have coverage. In the United States, health insurance is often tied to employment, so losing a job can mean losing access to affordable healthcare, a critical need during times of uncertainty and stress.

The problem is compounded by the fact that it can take time to find a new job, especially one that pays the same or provides similar benefits. During that period, bills can pile up, leading to missed payments, damaged credit scores, and debt accumulation.

Medical Expenses

According to a study by Harvard University, medical expenses are the leading cause of bankruptcy in the United States, accounting for a staggering 62% of all personal bankruptcies. For many Americans, an unexpected medical emergency can lead to financial ruin.

One of the Harvard study's most interesting findings is that most of those who filed for bankruptcy due to medical expenses had some form of health insurance. 78% of filers had insurance, debunking the myth that medical bills only affect the uninsured.

Medical expenses from uncommon or severe illnesses or accidents can rapidly run into hundreds of thousands of dollars, wiping out savings and retirement accounts, college money, and home equity in months.

According to a 2019 survey by the Commonwealth Fund, about 44% of working-age adults in the U.S. reported having trouble paying medical bills and nearly one-third said they had to deplete their savings or take on credit card debt to pay for healthcare. Once these have been exhausted, financial struggles can quickly spiral out of control, leading to bankruptcy.

Unaffordable Mortgage/Foreclosure

For many California residents, owning a home is the ultimate dream. However, for many homeowners, this dream can turn into a nightmare when they find themselves struggling to make mortgage payments or facing the threat of foreclosure.

According to a study by Forbes, mortgages have the biggest share of housing-related debt in California, accounting for 50% of bankruptcy motivations. With this in mind, it is essential to understand why people face unaffordable mortgages or foreclosure and what steps can be taken to prevent or navigate these financial struggles.

As of 2019, household debt, including mortgages and home-equity lines of credit accounted for over 60% of household debt, according to the Federal Reserve Bank of St. Louis. This demonstrates the significance of mortgages in the lives of most Americans.

While many homeowners purchase pricier homes and obtain bigger mortgages than they can reasonably pay, banks also contribute to this problem. When lenders’ requirements are lenient, borrowers can easily take on loans without afterthoughts. This was the case during the housing bubble of the mid-2000s when banks extend loans to individuals with little or no credit history.

Overspending Your Funds

Living beyond your means is a financial mistake that is all too common in our society. Overspending or not having a budget is one of the most significant contributors to people's financial downfall. When people ignore how much money they are spending and prioritize their wants over their needs, they risk drowning in debt and eventually declaring bankruptcy.

According to a study, approximately 44% of those filing for bankruptcy asserted that overspending significantly impacted their financial troubles. Overspending can take many forms, including buying luxury items, dining out frequently, or even exceeding the monthly food budget by small amounts. Using credit cards or personal loans to cover these expenses can be tempting, but it ultimately leads to unmanageable debt.

You want a budget for all necessary expenses, such as housing, transportation, and food. Budgeting helps prioritize expenses and identify areas where money is being wasted, allowing for necessary adjustments to reduce spending. In doing so, people can start to have their finances in order, reduce debt, and avoid financial ruin.

Spending more than you make means is not only a personal issue but can also be fueled by societal pressures. The culture of instant gratification and keeping up with the Joneses encourages people to spend more than they can afford. Advertisements for credit cards, personal loans, and other forms of credit make it seem easy to buy now and pay later without considering the long-term consequences.

However, lenders also have a role in people's financial situations. For example, credit card companies and lenders make it easy for people to accumulate debt by offering high-interest rates and hidden fees. Many people find themselves in a cycle of debt that seems impossible to break.

Supporting Relatives

It is a tough balancing act: you want to help your family members in need, but at the same time, you have to take care of your finances. Unfortunately, for many Americans, this dilemma can result in filing for bankruptcy.

According to a bankruptcy study, over 28% of respondents cited the significance of helping relatives as a contributing factor in their bankruptcy filing. And this is not surprising given the many Americans' demands in caring for their families.

For example, a 2020 AARP research study found that more than half of middle-aged adults between 40 to 64 years were providing financial help to their grown-up children over 25 years. Additionally, 32% of these midlife adults supported their parents financially.

While it is commendable to help your loved ones in times of need, this can also put you in a vulnerable financial situation. Nearly 30% of the medical bankruptcy study respondents said that helping their relatives strained their finances.

Divorce/Separation

Divorce or separation can be tough for those involved and have long-lasting emotional and financial impacts. While the emotional cost of separation is quite high, the financial cost can be equally devastating. In addition to legal costs, former spouses now pay for two households instead of one, all on the same income. This can lead to financial hardship and bankruptcy for many.

According to a 2010 report on the causes of insolvency, marital or relationship breakdown was the primary cause of bankruptcy for 14% of all bankruptcies. In some cases, the legal costs alone are enough to force individuals to file for bankruptcy. Legal fees related to separation can be astronomical, followed by a division of marital assets, a child support decree, and alimony.

One of the most significant costs associated with divorce is the legal fees. According to Forbes, a contested divorce can cost between $15,000 and $30,000 and this does not include fees for expert witnesses or other expenses that may arise during the process. When spouses cannot agree on the divorce terms, it can drag on for months or even years, adding additional costs that many cannot afford.

After the legal costs, former spouses must navigate the division of marital assets. In many cases, this can mean selling the family home, splitting retirement accounts and other investments, and dividing any other assets accumulated during the marriage. This can leave both parties with less than expected, leading to financial difficulties.

Child support and alimony are two additional costs that can make it difficult for individuals to make ends meet after a divorce. Failure to pay the support dictated in the agreement often leaves the other completely destitute. On the other hand, wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. In either case, it can lead to financial struggles and bankruptcy.

Unexpected Emergencies

Bankruptcy is often stigmatized as a result of poor financial management or overspending. Still, the reality is that unexpected expenses and emergencies can happen to anyone, regardless of income or lifestyle. In fact, according to a study conducted by the Consumer Financial Protection Bureau, medical expenses are the leading cause of bankruptcy in the United States, accounting for nearly two-thirds of all bankruptcies filed.

It is a myth that bankruptcy is always the result of something you can control. Often, the causes of bankruptcy are not what you expect. While poor spending habits can contribute to financial hardship, you can recognize that life can be unpredictable, and even the most responsible individuals can fall victim to unexpected expenses and emergencies.

Emergencies can hover around the corner, including a car breaking down, a tree falling on the roof, or catastrophic storm damage. In fact, according to a study by the Federal Reserve, 40% of Americans would struggle to cover a $400 unexpected expense. This means that even a minor emergency can be enough to derail your finances.

Without adequate savings and insurance, just one of these events can quickly drain savings that took years to accumulate. According to Forbes, the average cost of a car repair is around $500, while the average cost of a home repair can range from $1,000 to $4,000. And that is just for minor repairs - major repairs or damages from a natural disaster can easily exceed tens of thousands of dollars.

When you have insufficient savings or insurance to cover these unexpected expenses, you may use credit cards or loans to make ends meet. While these options can provide short-term relief, they often come with high-interest rates and fees, making it difficult to recover fully. A study by the National Bureau of Economic Research found that households who experience unexpected expenses are more likely to have credit card debt and more likely to default on that debt.

Poor/Excess Use of Credit

Credit cards, loans, and other forms of credit can be handy tools when used responsibly. They can help you make purchases and investments that you might not have been able to afford otherwise, and they can also help you build credit and financial stability. However, poor or excessive use of credit can quickly lead to financial hardship and even bankruptcy.

Many people lack control over their spending. They may use credit cards to fund purchases they cannot afford or take out loans to buy cars, homes, or other big-ticket items they do not have the income to support. It can become overwhelming when installment debt, credit card bills, and car loan payments pile up. Eventually, the borrower may lack the financial capacity to pay each debt installment.

In this situation, you want to take action before things worsen. Ignoring your debt won't prevent it; it will likely worsen things. The longer you wait to address your debt, the more interest and fees you'll accumulate, making it even harder to pay. If you cannot obtain money from your loved ones or a debt-consolidation loan, filing for bankruptcy could be the last option.

Reliable statistics show that many debt-consolidation plans stall for many reasons and usually only delay filing for many people. Even if sometimes home-equity loans are ideal for unsecured debt, once it is exhausted, you could face foreclosure on your property if you cannot make this payment.

According to a study conducted by the Federal Reserve, the average household credit card debt in the United States is over $8,000, with interest rates often hovering around 20%. Even making the minimum payment each month can be challenging and it can take years to pay the debt in full. And if you miss a payment, your credit score can be negatively impacted, making it harder to access credit in the future.

One of the biggest dangers of poor or excessive use of credit is that it can become a vicious cycle. As you accumulate debt and miss payments, your credit score will suffer, making it even harder to access credit in the future. You may turn to high-interest loans or credit cards to make ends meet, which will only worsen your financial situation.

Call a Modesto Bankruptcy Lawyer Near Me

Bankruptcy is becoming increasingly common in America, with over 1.5 million Americans filing for bankruptcy yearly, most of whom are individuals, not organizations. The most common reasons for personal bankruptcy include loss of employment, medical expenses, unaffordable mortgages/foreclosure, and living beyond one's means.

While bankruptcy can be a difficult and emotional decision, it can also provide a path to financial stability and a fresh start. If you are experiencing financial difficulties and are considering bankruptcy, seek professional legal advice to understand your options and make informed decisions.

At Modesto Bankruptcy Attorneys, we can provide you with the guidance and support you need to navigate bankruptcy's complex legal and financial landscape. Our qualified bankruptcy attorneys can help you understand the bankruptcy process, assess your eligibility for different types of bankruptcy, and provide guidance on protecting your assets and financial future.

If you are struggling with financial issues in or around Modesto that may lead to bankruptcy, do not wait until it is too late. Take action now by contacting us at 209-314-3010 to obtain help. Remember, bankruptcy is not the end of the world - it is a new financial beginning.