Bankruptcy is a fresh start to help get out from underneath the burden of debt. Most of the time, there are specific life circumstances that lead to changes in income or expenses, and bankruptcy can provide a lifeline when these unexpected circumstances occur.
There are many reasons that contribute to people filing for bankruptcy:
According to a March 2019 article from the American Public Health Association, despite the enactment of the Affordable Care Act, medical causes contributed to 66.5% of bankruptcies in the United States, which is equivalent to about 530,000 bankruptcies per year. These results were consistent with a 2009 article in The American Journal of Medicine which found that 62.1% of all bankruptcies were due to a medical cause. That study found that most people filing were well educated and middle class, and ¾ of bankruptcy filers had health insurance.
These articles highlight that regular, middle-class Americans, with health insurance, still cannot meet unexpected losses in income or increased medical expenses. A family member’s medical illness can quickly drain the family’s financial resources often resulting in thousands and thousands of dollars of debt, and often the family’s income cannot support these increased medical expenses. This can cause people to cash out their retirement and savings accounts, college education funds, and to cash-out equity in a home. Bankruptcy is often a better option before taking these drastic actions because a bankruptcy may be able to protect these valuable assets from creditors.
Job Loss/Reduced Income
As can be expected, a loss of a job or reduced income is another reason that many people file for bankruptcy. In fact, according to the March 2019 article from the American Public Health Association, 77.8% of bankruptcies are the result of job loss, which include people with medical problems that lead to job loss. Job loss or reduction in income from layoff, termination, resignation or otherwise can quickly deplete retirement accounts, savings accounts, and emergency funds, and can add an additional expense of COBRA insurance. Job loss can also make a mortgage payment unaffordable. Even with short-term and long-term disability insurance policies, the reduction in income is often not enough to cover a mortgage, 1 or 2 cars, and other living expenses.
Unfortunately, upon loss of a job or reduction in income, many people will cash out their retirement account which will result in heavy tax consequences and the funds in the account will lose their otherwise protected status from creditors. In a Maryland bankruptcy, most retirement accounts are fully exempt, and is it often a better decision to file bankruptcy before cashing out a retirement account, particularly if the funds are used to pay off particular creditors.
Divorce or separation contributes to 24.4% of bankruptcies, according to the March 2019 article from the American Public Health Association. Divorce can cause stress which can lead to medical illness or job loss, thus further contributing to a reduction in income, and additional expenses. Whether or not the divorce is contentious or amicable, people going through a divorce should consider talking to a bankruptcy attorney before, or in addition to, their divorce attorney or divorce mediator. With proper pre-bankruptcy planning, couples going through divorce or separation can maximize the benefit that a bankruptcy provides for one or both spouses. Married couples can file a joint bankruptcy which can significantly reduce the cost of the bankruptcy and can use exemptions that are not available for non-married couples. Additionally, married couples with dependent children can more easily pass the Means Test and file under Chapter 7 bankruptcy, as the income threshold for the Chapter 7 Means Test increases as household size increases.
Divorce and separation have a major financial impact on a couple. Often in divorce, one spouse is responsible for paying the mortgage payment while also having to pay for their own rent if the divorce is contentious. This can quickly deplete any savings and retirement funds that the spouse has. Talking to a bankruptcy attorney before the finances are divided is a good way to ensure that the spouse’s interests are protected and to put one of both spouses in the best position to file for bankruptcy and have a brighter outlook without having to worry about the burden of debt.
Spending Beyond Means
Living beyond a person’s means contributes to 77.8% of bankruptcies. Most often, these come in the form of homes and cars that people cannot afford, spending too much on food and household expenses, or taking trips and vacations that are not within budget. Some good indicators of living beyond one’s means are if 1) bills cannot be paid on time; 2) no funds are going towards savings; 3) low credit score; 4) maxed out credit cards; and 5) more than 28% of income is devoted to housing. If any of these indicators are met, bankruptcy may be the best option.
Trying to help friends and family
Although this seems like a kind act, helping friends or family too much contributes to 28.4% of bankruptcies. This includes co-signing on homes, cars, student loans and credit cards, and lending money to friends to help cover their rent or mortgage or other expenses. Co-signers on debts are more often than not jointly and severally liable for the debts, which means that if the debt is not paid, the creditor can pursue both the primary signatory and the co-signer.
If you have questions about bankruptcy, please schedule a consultation or call Steiner Law Group at (410) 670-7060.