When someone files for bankruptcy, it often signals a point of no return. It means that the person needs to have a fresh start, reorganizing their finances and building it all up. This is not a choice made lightly. It is usually the result of a long struggle. When you file for a Chapter 7 liquidation and Chapter 13 reorganization bankruptcy, you are overwhelmed by your debts. Most people believe bankruptcy happens only when you mismanage your finances. However, the causes of bankruptcy are often much more nuanced.

Medical Expenses

In the U.S., you pay a considerable price for a health crisis despite advances in medical technology. Medical costs keep rising, making even essential treatment costly. Medical costs could spiral out of control fast if you suffer a serious illness or injury. Even with insurance, high deductibles, co-pays, and uncovered treatments leave you liable for many out-of-pocket expenses. One of the leading causes of bankruptcy is medical debt. Many people file or consider filing due to accumulating medical expenses. A 2019 study published in the American Journal of Public Health claims that medical debt contributes to 66.5% of bankruptcies. Thus, many Americans are at risk of bankruptcy just due to medical expenses.

A sudden serious illness or accident can put you into dire financial trouble overnight. A treatable ailment can become a lengthy hospitalization requiring multiple surgical procedures and rehab. If you are ever diagnosed with cancer, for example, you may find it hard to cope with the expenses of chemotherapy, radiation, or special treatment. Even with insurance, these fees can wipe out your savings and compel you to make hard choices about paying for living essentials versus medical care. Cancer, heart attacks, and major injuries are among the reasons people run out of money and later go bankrupt. The treatment, hospitalization, and medicines required to treat these ailments are often too expensive.

Financial strain intensifies due to the complicated nature of billing. You will likely receive multiple bills from various providers with confusing charges. Insurance often rejects some procedures, leaving you with extra charges to pay. Having to negotiate with hospitals or healthcare providers can be overwhelming. While some nonprofit organizations and government programs will help you negotiate, their help is limited. Moreover, being underinsured (having health coverage with high deductibles or restrictions) further weakens your safety net by leaving you open to substantial out-of-pocket expenses that quickly spiral out of control.

If you cannot pay your medical bills, bankruptcy could help you regain financial control. You can wipe out certain qualified debts through Chapter 7 bankruptcy, allowing a fresh start. This option would require passing a means test for financial hardship. If you do not qualify for a Chapter 7 bankruptcy, Chapter 13 will enable you to restructure your debt into a repayment over several years to lighten the load.

While bankruptcy does offer relief, it comes with some consequences, such as:

  • Damage to your credit score

  • Reduced loan access

  • Difficulty securing housing, or

  • Challenges securing a job

Before filing for bankruptcy, you should consider other options for your medical bills. Many hospitals and health providers offer repayments that break large bills into smaller amounts that are more manageable. Using a debt consolidation program, you can group multiple medical bills into one loan with a lower interest rate. You could avoid or reduce medical bills through bill forgiveness programs, which are usually operated by charity foundations or hospital financial assistance programs if you meet the income requirements. However, you must strictly follow the payment agreement and may not resolve all your cash-related problems.

Job Losses

Losing your job can send your finances into a tailspin, destabilizing you and leading to a debt burden. If you do not have a regular source of income, it will not take long before you cannot pay for essential expenses. And you will soon find yourself making difficult financial decisions.

Unemployment benefits can help temporarily but cannot cover all your expenses, especially if you live in a high-cost area. According to the Bureau of Labor Statistics (BLS), the length of time people are unemployed varies depending on the state of the economy. Sometimes, the average length of time people are unemployed is several months. However, finding a job in an economic downturn can take months or even longer. Many people have to file for bankruptcy as their savings run out, and they increasingly rely on credit cards.

Because of discretionary spending, some businesses and industries are likelier to experience job cuts, particularly in manufacturing and retail. Economic downturns and automation typically wipe out jobs, leaving employees with few alternatives. Working on reduced hours or earning less can cause similar financial damage, even if you keep your job. A slight decrease in income might be manageable at first, but if you are living paycheck to paycheck, it can turn into not being able to pay your bills on time, growing bills, and a looming threat of bankruptcy.

Taking immediate action is essential for maintaining financial stability. When your income drops, you need to consider budgeting. Focus on essentials and cut out non-essential spending. Look for help from the government or nonprofits for quick assistance. You can negotiate with your creditors and try to have your payments reduced as part of debt management strategies. However, if you are out of work and bills keep piling up, this may not be enough to avoid a financial disaster.

An emergency fund can be a lifesaver if you lose your job because it will help you pay your bills while looking for a new job. However, many people do not have enough savings to manage without debt. When it is impossible to pay the debt back, bankruptcy may help. Filing for Chapter 7 or Chapter 13 can provide relief by discharging the debt or restructuring it into manageable payments. The bankruptcy option often allows the debtor a fresh start, but even an application for bankruptcy has long-term negative consequences.

Retraining or taking a new job could help you regain your footing financially. Training for or even starting a business can boost your income potential and create new opportunities. These steps can provide a sustainable solution to financial uncertainty even though they take time and resources.

Poor Financial Management and Excessive Debt

People often file for bankruptcy because of financial instability occasioned by poor financial management and excessive debt. Emergencies like job loss or health issues cause people to go into debt. However, excessive spending, lack of a budget, and poor financial planning play a significant role in long-term debt accumulation. Many people fall into the trap of easy access to credit cards or other borrowing options, which creates the illusion that they can afford to spend more than they earn.

Your debt-to-income ratio is one way you can determine your financial health. This is your total debt obligation versus your gross income. When your debt-to-income ratio is too high, it shows your financial instability. As expenses consistently surpass income, debt can quickly accumulate and lead to bankruptcy as a possible outcome. Monitoring this metric and reducing the debt-to-income ratio is crucial for stable finances and avoiding long-term financial difficulties.

Budgeting serves as the foundation of financial management. Well-organized budgets help you monitor your spending, categorize your expenses, and track unnecessary expenses. Having realistic financial goals (long- and short-term) can help you remain financially secure. However, you have to keep monitoring and adjusting your budget. When you overspend, make adjustments immediately. Otherwise, you will strain your finances further. This will help you maintain long-term financial stability.

You can take advantage of debt management strategies to get your finances back on track, specifically:

  • The debt snowball approach  — This prioritizes the smallest debts first, as this often creates a sense of accomplishment and will motivate you to proceed

  • The debt avalanche strategy—This method prioritizes paying off high-interest debts first to lower the overall costs of interest payments over time

The choice of which method is best depends on your finances and your psychological preferences.

Apart from these repayment strategies, you can use debt consolidation and settlement as another option. Debt consolidation occurs when you have multiple debts that you combine into one debt. One loan could have a lower interest rate depending on your creditworthiness and loan terms. Thus, repayment becomes easy, and monthly payments may be lowered. In contrast, debt settlement involves negotiating with creditors to reduce the overall amount owed. Though this can help with financial relief, it negatively impacts the credit score and may not be viable for everyone. Understanding the benefits and drawbacks allows you to make financial choices that work for your goals.

Emotional spending plays a significant role in accumulating debt. It is also part of poor money management habits that could lead to financial instability. Debt management services that help with credit can also help you manage your debts.

As mentioned before, emergency funds can be a lifesaver. Not having one is part of poor money-management habits. Emergency savings stop situations from becoming full-blown financial crises. Creating cash reserves in advance can save you from high-interest debt when an unplanned expense arises. Ideally, experts say you should save at least three to six months’ worth of living expenses. If you do not have an emergency fund, prioritize saving as much as possible, as it helps tighten up your financial security over time.

If debt becomes unmanageable despite these strategies, you may have to file for bankruptcy: Chapter 7 and Chapter 13 bankruptcy offer legal options for discharging or restructuring debts.

Financial management requires discipline, conscious spending, and proactive debt management. You can take charge of your finances and avoid bankruptcy by frequently evaluating your financial progress, modifying your budget, and exploring efficient debt-decrementing measures.

Divorce and Separation

Money problems often arise when marriages break down. The financial burden can escalate quickly when creating separate homes, paying lawyers, and dividing assets. Even those who have managed their finances carefully could find themselves facing unexpected financial burdens. A marriage breakup comes with a lot of emotional stress and often leads to financial instability. In many cases, it also leads to bankruptcy.

You may have to pay alimony and child support payments as part of the separation. Alimony and child support are essential to help dependents, but they can significantly reduce your leftover income. Managing expenditures could be a tightrope walk if you now maintain two separate households on a diminished income. The financial situation becomes even more precarious when considering the joint debts, which may no longer be shared post-divorce as other forms may be but will remain your liability. Managing a mortgage, credit card bill, or car loan with your partner is easy. However, it becomes burdensome when these bills are divided in ways that may not align with your ability to pay.

Debt problems after divorce can be overwhelming. When you struggle to meet your financial obligations, it is beneficial to file bankruptcy. The first step is understanding how marriage obligations can impact you going forward. You cannot discharge debts like child support or alimony in bankruptcy. This shows a vital understanding of bankruptcy in divorce and how it works in the divorce context.

For example, you can discharge different debts by filing for Chapter 7 bankruptcy, which can help you make a fresh start. Although you can stop paying certain debts when you file for bankruptcy, some debts, like child support and alimony, will still be owed. On the other hand, Chapter 13 bankruptcy could be your best bet if you are stressed out with enormous debt and need to reorganize. It helps you to repay your debts while keeping your property safe, like a car or home.

Bearing your spouse’s debts might be one of the most significant financial risks. If the divorce decree assigns a debt to your ex, but your name is still on the loan, creditors can still come after you. Your ex could create a big mess relating to your credit if they do not pay what they are supposed to meet their obligations.

Act on your joint debts before the divorce is finalized to avoid these challenges. It may help to refinance or get off joint accounts to protect your credit and finances.

Following a divorce, you have to adjust to the new financial realities. With less income and increased expenses, you need a budget to be transparent about where your money goes. Learning how to track expenses, prioritize needs over wants, and identify areas you can cut back on is necessary. It may not be easy. However, if you set realistic short-term and long-term goals, you can ensure you have a roadmap that will help you rebuild your finances.

After preparing a budget, it is equally important to manage your debt. You can negotiate with creditors for a better deal if you cannot pay off credit card dues and loans. Many creditors will work with you if you inform them of your struggles should you fall behind on your payments. Making arrangements to lower interest rates or payment deadlines can offer immediate relief from your financial stress. If you are currently struggling with credit card debt and paying on more than one card, it might be worth paying off the card with the lowest balance first (the snowball method) or the highest interest rate (the avalanche method).

If you want to secure your financial future after a divorce, being vigilant helps. The sooner you identify the issues and act, the more you can help yourself gain control over your finances. Hopefully, you will be able to manage your money with either specific tools or software.

Consider debt consolidation or settlement options if you take on too much debt. Debt consolidation brings multiple debts together into one to repay quickly with one monthly payment, and this payment usually contains a lower interest rate than an individual loan. On the other hand, debt settlement is when your creditor and you reduce the total debt amount you owe. Debt consolidation and debt settlement can be convenient methods to help manage your loans. However, just like all things in life, use these strategies cautiously. They could have long-term effects, like affecting your credit score.

Sometimes, a divorce forces you to make challenging financial choices that might have a long-term impact. However, you can recover from the financial fallout of divorce if you take a thoughtful approach to your finances, realize the implications of bankruptcy, and manage your debts. Careful and diligent planning will help you restore your finances.

Find a Bankruptcy Attorney Near Me

Understanding why people file for bankruptcy can help you avoid it in the future. When you notice you are struggling financially early on, you should act immediately and address the issues before they disorganize your finances and put you in significant debt and avoid bankruptcy. However, a qualified bankruptcy attorney is your best bet if bankruptcy is unavoidable. An experienced attorney will help you navigate the bankruptcy process. They will also help you explore options, including debt consolidation and settlement, to mitigate the long-lasting effects on your finances. They can help you make informed decisions, protect your rights, and pursue the best option for a fresh start.

If you are facing financial hardship and considering bankruptcy, please contact the Los Angeles bankruptcy attorney for expert advice. Our team will assist you every step of the way, providing the support and legal advice you need to regain control of your financial future. Contact us today at 424-285-5525 for a consultation.