People rarely fall into substantial financial problems enough to consider bankruptcy. Most frequently, it's a double whammy, for instance, losing employment and having a serious illness or getting a large mortgage just before their companies close down. Financial irresponsibility can also be a problem, but it is rarely the only one.
A person might declare bankruptcy for a variety of reasons, not just financial hardships. Numerous studies on the causes of bankruptcy have been conducted in recent years.
The following list's ranking is mostly based on a study published on the American Journal of Public Health in February 2019.
Income loss tops bankruptcy list
The loss of income was the top justification for declaring bankruptcy, as stated by approximately 78% of survey participants, the report showed. Given that the majority of people depend on income from work to pay bills, this shouldn't come as a surprise.
According to a 2019 Charles Schwab survey, 59% of Americans struggle to make ends meet.
When the paychecks stop coming in, financial difficulties may follow quickly. Unfortunately, few Americans have sufficient funds to last them for a while. According to a 2019 Federal Reserve research, 39% of Americans lacked the financial resources to simply pay a $400 unforeseen expenditure.
Additionally, job loss could result in losing your health insurance, because of inability to pay insurance premium. In case of illness, you’ll vulnerable to paying hospitalisation bills, unless you obtain another insurance in the interim.
Health-related costs and inadequate insurance lead to bankruptcy
In the medical bankruptcy study, almost 59% of participants reported high medical costs as a primary reason for declaring bankruptcy. In addition, 44% of respondents mentioned medical issues resulted in the loss of employment, highlighting the inter-connectedness of these issues.
There are numerous initiatives to assist those who lose their jobs in keeping their health insurance. Many laid-off employees were allowed to continue their ex-employer's insurance plan for a while thanks to COBRA, a federal law that has been in effect since 1985. However, COBRA makes it unaffordable, especially for jobless, as it forces them to pay both the employee’s share and their employer's previous share of the insurance cost, plus administrative fees.
Bankruptcy caused by excessive mortgage/foreclosure costs
Home mortgages are the single greatest source of household debt in the United States, considerably outpacing credit cards, auto and school loans, and all other categories. They are cited as the reason for bankruptcy by 45% of respondents. According to the Federal Reserve Bank of St. Louis 4, at the end of 2019, around 70% of family debt in the U.S. was tied to housing, which includes both mortgages and home equity lines of credit.
Lenders are also involved in giving credit, even though borrowers wind up purchasing more costly homes and taking on larger mortgages than they can afford. If they lose jobs or face another financial setback, borrowers can quickly go into debt, when lending standards are weak, as experienced in the mid-2000s housing bubble.
In contrast, the trade publication American Banker 5 reported that in mid-2020, mortgage applicants faced the "toughest loan-approval standards in years." For instance, some large lenders now require a minimum credit score of 700 and/or 20% down payments. Although it's of little comfort to those who desire a mortgage but are unable to obtain one, the tougher rules may eventually result in decreased bankruptcy rates.
In the medical bankruptcy study, slightly more than 44% of participants acknowledged that living beyond their means or overspending contributed to their bankruptcies. Of course, there are many different ways to overspend, from regularly maxing up your credit cards on shopping trips to occasionally going overboard on the family's food budget. Contrary to situations like losing a job or becoming ill, which they may not be able to prevent, this one is a mistake committed by the person himself.
Sometimes, bankruptcy is caused by helping out family members or other people, as stated by 28% of the respondents.
An American Association of Retired Persons (AARP) report showed the demands placed on many Americans by their families. About 51% of "midlife adults," aged 40 to 64, support their adult children financially, while 32% of them were also supporting their parents. While providing such support may help prevent the younger and older age groups from experiencing bankruptcy, it increases the vulnerability of the middle group. Nearly 30% of those surveyed claimed that helping out their family members put "severe pressure" on their own money.
Of course, those aren't the only justifications for declaring bankruptcy. Others are student loan debt (25%), as well as divorce/separation (24%). Even though student loan debt is a crippling burden for many Americans today, it may not have scored higher because it is highly difficult to discharge through bankruptcy, though it is not impossible. Therefore, bankruptcy might not be a solution if a person's only or main financial issue is student loan debt.