Five Principal Causes of Bankruptcy
Numerous studies on the causes of bankruptcy have been conducted in recent years, and although the reasons may sometimes vary in order, the main ones almost never do. The following list's ranking is mostly based on a study that appeared in the American Journal of Public Health in February 2019.
1. Income Loss
According to the report, this was the top reason for declaring personal bankruptcy, as stated by approximately 78% of survey participants. Given that the majority of us depend on our income from a work to pay our expenses, this shouldn't come as a surprise.
2. Health-Related Costs
In the medical bankruptcy research, over 59% of participants reported high medical costs as a primary reason for declaring bankruptcy. In addition, 44% of respondents mentioned medical issues that had resulted in a loss of employment, highlighting the interconnectedness of these issues.
Numerous initiatives are available to assist those who leave their employment in keeping their health insurance. Many laid-off employees are given the opportunity to continue on their ex-health employer's plan for a while thanks to COBRA, a federal statute that has been in effect since 1985. The issue is that COBRA makes it expensive for many individuals, particularly while they're out of work, since it forces the employee to pay both their half and their employer's previous share of the insurance cost, plus an administrative charge. [4], [5]
Additionally, the Affordable Care Act (ACA) of 2010 was designed to assist by expanding access to health insurance for Americans who had previously been unable to afford it. There is now conflicting research about how well it reduces bankruptcy. The 2019 study's conclusions are encapsulated in the title of the publication, "Medical Bankruptcy: Still Common Despite the Affordable Care Act." In particular, it argued that although the ACA broadened access to healthcare, the chronically poor—those with minimal assets and little chance of becoming bankrupt in the first place—had benefited most from it. Contrarily, more wealthy Americans continued to be at the whim of excessive medical expenditures, including growing copayments and deductibles.
3. Excessive Mortgage/Foreclosure Costs
Home mortgages are the single greatest source of household debt in the United States, considerably outpacing credit cards, auto loans, school loans, and all other categories. They are cited as the reason for bankruptcy by 45% of people. According to the Federal Reserve Bank of St. Louis 4, by the end of 2019, housing-related debt, which includes mortgages and home equity lines of credit, made up almost 70% of all household debt in the United States.
Lenders are also involved in this, even though many individuals wind up purchasing more costly houses and taking on larger mortgages than they can afford, particularly if they experience job loss or another financial setback. Borrowers may quickly go into debt when lending standards are weak, as they were prior to the mid-2000s housing boom.
In contrast, the trade publication American Banker 5 reports that by mid-2020, mortgage applicants would face the "toughest loan-approval requirements in years." For instance, several large lenders now demand a minimum credit score of 700 and/or 20% down payments. Although it's of little comfort to individuals who desire a mortgage but are unable to get one, the tougher rules may eventually result in decreased bankruptcy rates.
4. Extending Their Resources
In the medical bankruptcy research, slightly more than 44% of participants acknowledged that living above their means or overspending contributed to their bankruptcies. Of course, there are many other ways to overspend, from regularly maxing up your credit cards on shopping trips to sometimes going beyond on the family's food budget. Contrary to situations like losing a job or being sick, which they may not be able to avoid, this is one over which individuals can have some degree of influence.
5. Made an effort to assist other relatives
A person might declare bankruptcy for a variety of reasons, not simply their personal financial hardships. Sometimes, as 28% of the participants in the medical bankruptcy research revealed, it might also be necessary to help out family members or other people.
