Bankruptcy is much more common than most people think. The number of bankruptcy filings in the United States has been increasing reliably ever since the 1980s, hitting a peak of 2 million cases in 2005 – that’s nearly 2 percent of households. Since then, bankruptcy filings have subsided slightly, but we’re still seeing hundreds of thousands to millions of individual filings every year.
Why is bankruptcy so common? And what should you understand about this phenomenon?
The Many Types of Bankruptcy
First, you should understand that there are many different types of bankruptcy. While we just use one word to describe this process, there are many different potential paths forward that are allowed by law.
For starters, there are different bankruptcy opportunities for businesses and individuals; if you’re reorganizing a corporation’s debt, you’re going to follow a different process than if you’re trying to reorganize an individual’s debt.
Additionally, different types of bankruptcy chapters allow different types of debt forgiveness and different options going forward. Chapter 13 bankruptcy, for example, allows you to retain possession of your property, while restructuring your debt into a more manageable payment plan.
Causes of Bankruptcy
What makes bankruptcy so common?
The short answer is that there are many people in the United States living in financial hardship. We can split the factors leading to bankruptcy into two main categories: background factors resulting in a person more likely to experience financial hardship and inciting factors that function as “the last straw,” leading people to file bankruptcy for bankruptcy protection as a last resort.
Background factors include:
- Poverty. It’s no secret that living in poverty makes you more likely to file for bankruptcy. Uneducated and undereducated people often struggle with a lack of income and no easy way to improve their future potential. If you’re stuck in the poverty trap, it may feel nearly impossible to escape.
- Lack of financial discipline. Commonly, bankruptcy is the consequence of years of no financial discipline. People often spend money recklessly, racking up credit card debt, while neglecting their income and savings. If you know a person that handles their finances in such a manner, they may end up filing for bankruptcy.
- Age. It’s also worth noting that bankruptcy filings increase with age. As you get older, you may earn less, while facing steeper living costs and other expenses.
Inciting factors include:
- Medical bills. By far the most common inciting factor for bankruptcy is medical bills. Medical care is ridiculously expensive, especially without insurance, leaving people wholly unprepared for such catastrophes.
- Emergencies. Other emergencies may also lead to bankruptcy. If your home is in need of a serious repair, for example, the cost to resolve this situation may be financially unsustainable.
- Job loss. Some people file for bankruptcy after experiencing job loss. If you no longer have money coming in, but your expenses keep mounting, there may be few other options for you.
Preventing Bankruptcy
Fortunately, there are many steps you can take to prevent bankruptcy in your own life:
- Invest in yourself. The best thing you can do is invest in yourself. Taking classes, getting training, and gaining more experience are some of the best ways to set yourself up for a better future career. Working hard, meeting other people, and pressing for better, higher paying opportunities will make sure you’re never caught in the poverty trap.
- Create an emergency fund. Next, build an emergency fund. Most people who file for bankruptcy due to an emergency are unprepared for the financial devastation. Don’t let yourself fall into this position. If possible, set aside a bit of money every month until you have several thousand dollars to work with. Then, if you face a massive home repair or an emergency medical issue, you can tap into your emergency savings rather than going into debt.
- Live below your means. One of the best pieces of financial advice you can follow is to live below your means. In other words, if possible, you should live on less money than you earn. You may be able to afford a bigger house in a nicer neighborhood, but living in a smaller house, in a less desirable neighborhood could save you lots of money. Similarly, you should avoid going into debt unless necessary. This approach does require making sacrifices, especially if you’re living on a limited income. But any positive changes you make to your financial situation, can ultimately reduce your chances of eventually resorting to bankruptcy.
Embracing Bankruptcy
Of course, you also shouldn’t rule out the idea of bankruptcy protection. We rightfully see bankruptcy as a last resort, and it’s not something you should proactively seek out. But bankruptcy exists to help honest people in an impossible financial situation.
If you ever find yourself with an overwhelming amount of debt and no realistic way of paying it, consider talking to a bankruptcy lawyer about your options. Bankruptcy may be more helpful than you think.