The 8 Most Common Reasons to File for Bankruptcy
Are you thinking about filing for bankruptcy? Take a look at the 8 most common reasons to file for bankruptcy and contact your attorney for help.
Filling for bankruptcy may be a viable option for you if you’re faced with financial troubles.
With that said, bankruptcy does come at a cost so you need to understand the pros and cons of making such a move. A bankruptcy attorney will be able to advise you on whether or not it’s a smart move for your situation.
Today, we’re taking a closer look at the most common reasons to file for bankruptcy so you can make an informed decision whether or not you need to take the next step. The next step, of course, is contacting a lawyer for help so you can work through the process efficiently.
Let’s get started.
The 8 most common reasons to file for bankruptcy
Bankruptcy traditionally has had a negative connotation, with people in financial trouble hesitant to consider it because they see it as a blemish on their reputation, a reflection on their character. But it can be a game changer financially and can be a way to start fresh, and ironically, can reflect a smart financial decision.
There are many good reasons to file for bankruptcy. And there are a few bad reasons. There are good times to do it and bad times. It’s a process that calls for professional advice and counseling, and it would be wise to involve a qualified bankruptcy lawyer.
First, let’s take a look at the 8 most common reasons to file for bankruptcy.
Medical Debt
According to a Harvard study, 62 percent of those filing for bankruptcy said that medical debt due to a catastrophic illness was the reason they filed. Many of these people had insurance, but the deductible was very high or the insurance didn’t cover the type of medical condition that arose unexpectedly. They simply got a lot of medical bills they couldn’t pay.
Loss of Job
How many times does it happen that someone goes out and buys a house or a car, and then loses his job without warning? Maybe his kids just started college. Maybe there is a wedding in the air. A loss of income can be devastating.
In addition to losing income, the person loses medical coverage and maybe has to look for another job somewhere else with relocation and retraining expenses. Creditors are not sympathetic to these unexpected obstacles to making payments.
Divorce
There can be financial problems during a marriage. There are usually some financial bumps along the way. But these are nothing like the enormous problems divorce can create.
If there were difficulties in paying the bills with two incomes, it will be more difficult with one. Keeping the same lifestyle will be questionable, and changes would almost certainly have to be made.
Ongoing debts would have to be addressed from a new perspective including mortgage payments, private school or college tuition, loans and credit cards. In addition, filing for divorce can lead to more bills for alimony, child support, and court expenses.
Bank Foreclosure
If your bank is about to foreclose on your home, you can use bankruptcy to stop the foreclosure through the automatic stay that comes with bankruptcy. This prohibits lenders and creditors from continuing collection actions against you. Chapter 13 is the bankruptcy process that lets you catch up on mortgage payments. Other forms of bankruptcy do not give you this privilege. That’s why a bankruptcy attorney is an important consultant. He can guide you in the right direction.
Car Repossession
If you are about to lose your car to repossession, you can stop the process through bankruptcy. You are granted a temporary stay which may give you time to catch up on payments (Chapter 7) or make back payments part of your recovery plan (Chapter 13).
Moving to a New State
You don’t have to relinquish all of your property as part of the bankruptcy process. States have different exemption laws that protect property. Some laws are more favorable than others. Each state has a list of exemptions that can possibly help you retain all or most of your property.
If you have just moved to a new state and the exemptions are different and not as favorable as your old state, an attorney can advise you of how to use the exemptions strategically. Sometimes you can use the exemptions that are more beneficial.
Being Evicted
If you are being evicted by your landlord (but it hasn’t happened yet), you can use bankruptcy to temporarily stop it and buy time. You will still have to pay the rent at some point. There are some exceptions to this. If your landlord already has an eviction order, then bankruptcy can’t stop it. If you are being evicted for drugs, criminal activity, or other illegal activities, then bankruptcy can’t help here either.
Being Sued
You can be sued for a variety of reasons including credit card debt, medical debt, vehicle accidents, breach of contract, patent or copyright infringement or many more legal infractions. Bankruptcy can stop them and may even get the charges dismissed. Not all court actions can be stopped by bankruptcy. An attorney will know what can and cannot be pursued.
Aside from the more common reasons to file for bankruptcy, there are a few bad reasons to avoid.
Bad Reasons to File
If you are behind in payments for small unsecured loans like credit cards or medical bills, the lender doesn’t have anything to repossess. Most of these lenders would have to go to court and sue you in order to garnish your wages or take other significant action against you.
Sometimes, if the debt is small, the lender will just write off the debt as uncollectable. The lender might accept a sum payment for part of what is owed. Or the lender will be open to negotiation on terms or interest.
It is not necessary to file for bankruptcy in these situations. Your lender will work with you because they know if you do file, they will get little or nothing in return.
There is another bad reason to file, and that is to just stop collections agencies from calling you. There is a better way to do this. You can just send a certified letter requesting the collections company stop calling you. The collections agent is bound by the Fair Debt Collections Practices Act (FDCPA) which prevents them from calling after you contact them.
In an ironic twist, you can sue the collector if that company violates the FDCPA. You should keep good records like calls, voicemails, and emails that prove you were contacted after you asked them to stop.
Stopping the collections agency from harassing you does not affect your relationship with your lender, however. You still need to repay the debt.
There are certain kinds of debts that cannot be discharged through bankruptcy so it would not be a good idea to file in this case. Examples of these debts would be income taxes, court judgments, child support and student loans.
And there is no need to file in order to protect your unemployment income, Social Security, welfare or government-guaranteed student loans. Creditors cannot take these from you.
There is a lot to know about filing for bankruptcy. If you have a good reason to file, then you also have a good reason to hire an attorney.
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