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Monday, April 19th, 2010

by Theodore Sliwinski, Esq.

The bankruptcy statistics in America are getting higher each year. Even the passage of the Bankruptcy Reform Act of 2005 could not slow the high rates of filing for bankruptcy.  Following is a list of the most common causes of bankruptcy.

1. Medical Bills

Medical bills are a major cause of many bankruptcies. I had one case wherein one of my debtors had a stroke and he had $950,000 of medical bills. He could not afford to pay for these bills. How could a person possibly recover from such a serious medical condition by dealing with such outrageous debt. Severe injuries or serious diseases can easily result in hundreds of thousands of dollars of medical bills. These medical bills can quickly wipe out your life savings, retirement accounts, college education funds and your home equity. Once these assets have been wiped out, then the desperate debtor is forced to rack up thousands of dollars of medical bills. The debtor has no choice but to rack up these high medical bills or he will become even sicker or possibly could die.

2. Loss of a Job

Whether due to a layoff, termination or resignation, the loss of income from a job can be equally disastrous. Only a few of the lucky unemployed Americans are fortunate to receive severance packages. Unfortunately, most of the unemployed sadly find their pink slips on their desks or lockers and they receive very little notice. Most debtors have no emergency fund to live on and they are forced live on credit cards. This is no way to live and it is a recipe for  disaster. If you use your credit card to pay for McDonalds and for your everyday living expenses it will sooner or late cause many once responsible people to file for bankruptcy. The interest rates on credit cards rack up balances much more quickly than the average American can pay off the card. Furthermore,  the loss of health insurance coverage and the cost of paying for COBRA insurance also makes the life of the unemployed even more miserable. Many debtors who are who are not able to find a decent job for a long period period of time are simply not able to recover financially.

3. The Overuse of Credit Cards and Home Equity Loans

Many debtors simply can’t control their lavish and careless spending habits. You can’t live like a rap star if you only earn $50,000 per year. Credit card bills, taking out home equity lines of credit, car loans and student loan payments can eventually spiral out of control and ruin your finances. Many debtors can’t keep up with all of these debts, and they are not even able to make the minimum payment on their credit cards. For many debtors they feel like they are a gerbil on a treadmill, and they eventually can’t keep running forever. It is important to note that most debt-consolidation plans also fail for many reasons. Most debt consolidation plans only delay a debtor from eventually filing for bankruptcy.

4. Divorce/Separation

The big divorce also frequently creates a financial disaster for both spouses. Legal fees can be substantial in a contested divorce case. Moreover, many separated couples who were used to living on two incomes are in for quite a financial shock when they try to make their bills by living only on one paycheck. Additionally, high child support and alimony payments often force a payor spouse to file for bankruptcy.

5. Unexpected Expenses

The loss of your home or your personal property caused by theft or casualty, such as floods, storms, or a storm for which the owner is not insured can force some people into bankruptcy. Thousands of Americans who lived in the the Gulf Coast states were forced to file after Hurricane Katrina. Many homeowners are unaware that they must take out separate insurance coverage for certain events such as floods. Those who do not have insurance coverage for this type of casualty can face the loss of not only their homes but most or all of their personal possessions as well. Not only must they then pay to replace these items, but they must also find a way to pay for food and shelter to try to “eke out a living.”