Consumer bankruptcy filings are down across the country. This could be a sign of a continually recovering economy. However, the reasons for those filings have not changed. Many people unfamiliar with bankruptcy think that it's simply an issue of bad budgeting. Sometimes, it is, but that issue doesn't even make the top 5. Here are the top 5 reasons:
5. Less Income
I differentiate this from the actual loss of a job. Many companies, to offset expenses, have reduced hours, benefits, and bonuses to employees. Remember the 90's film Christmas Vacation starring Chevy Chase? His character, Clark Griswold, wants to surprise his family with a pool in the backyard. He's already put a down payment on the installation and he's counting on his Christmas bonus to pay the rest. Instead of the monetary bonus, he has received every other year, he gets a membership to the Jelly of the Month Club. Now, a pool is a luxury but what if Clark was counting on that to pay for his daughter's college tuition or to pay in advance for a year's worth of daycare? Suddenly, not receiving that money may have terrible consequences.
Divorce can be heartbreaking but it is almost always expensive. Very few couples live on one income. Typically, there are two incomes and they live like they have two incomes. Most couples don't live on one income and save the other income for retirement or savings. They live on both incomes, pooling those resources to afford better stuff. When that couple divorces, they now have to set up two separate households. Think of all the bill doubling overnight. Two homes. Two water bills. Two gas bills, etc. This doesn't even count the cost of the divorce itself in terms of attorney's fees. I once did a bankruptcy for an individual whose divorce cost so much ($100K+) that there was literally nothing left to fight over.
3. Job Loss
This needs no further explanation. All of us, having made it through the Great Recession of 2008, no someone, probably many someones, who lost jobs and spent an extended time unemployed. The prevailing thought is that you should have about 6 months of income in savings just in case you lose your job. Let's say you gross $3,000 amonth and your spouse grosses another $2,000. Do you have $30,000 in savings right now? Not in retirement. Just in savings. What happens if you are out of work 7 months not 6? Or you are unemployed for a year or more?
2. Unexpected Catastrophe
Many Americans each year havean event occur that no one can for see that completely changes the course of their lives. This could be the death of a spouse, a house burning down or natural disaster. I grew up in New Orleans but was living in New Mexico at the time of Hurricane Katrina. Many of my friends were unable to return to their homes, even if they weren't in a part of the city that was hard hit, for more than six weeks. The businesses they worked at were shut down. When they returned home, there were extended fights with insurance companies over coverage. This was the first time many found out that they were under insured.
1. Medical Expenses
A Harvard study found that 62% of bankruptcies were due to medical expenses. Many people believe thatbecause of the ACA (otherwise known as Obamacare) this can't happen but refer back to number 2. People still get to choose their insurer and what benefits they will actually receive. While there is now a cap on out of pocket expenses, that cap is still more than $10,000 for a family bringing us back to the savings reference in number 3. Do you have another $12,500in saving for uncovered medical expenses?
These examples may paint a bleak picture, but I hope it makes you think about how easily you could find yourself seeking bankruptcy protection and you may not want to be too quick to judge others for seeking it themselves.