The studio audience groans every time the wheel lands on “Bankrupt†on the popular game show Wheel of Fortune. It means the contestant loses out on the chance to rack up money by getting letters on the board and they lose any funds they’ve accumulated up to that point.
This stroke of bad luck can be hard to watch on an otherwise feel-good game show.
Bankruptcy in real life is similar, in that it can cost Americans their financial progress — in some cases even requiring borrowers to liquidate assets like their home and vehicles. And, unlike a game show, which ends after its assigned TV slot, bankruptcy will hang around on the credit reports of those who’ve filed for seven years (Chapter 13) or 10 years (Chapter 7).
While the number of Americans entering bankruptcy is on the decline year over year, the period between 2018 and 2019 still saw 772,646 filings.
There’s a common misconception that bankruptcy is usually the result of frivolous, avoidable spending. While this may be true in some cases, there are many other reasons people may file — many of them extenuating circumstances beyond borrowers’ direct control.
Here are four reasons Americans declare bankruptcy.
#1. Medical Bills
Have you ever received a medical bill that left you wondering how you were possibly going to pay it? You’re certainly not alone if you have. CNBC cites more than 137 million Americans experienced financial hardship as a result of medical bills in 2019. This makes medical bills the top reason people consider withdrawing funds from retirement savings or filing for bankruptcy.
The tough thing about medical bills is that it’s not always possible to predict how much they’ll be until after a procedure or visit to a provider has already happened.
#2. Layoffs/Loss of Income
If we’ve learned anything from the COVID-19 pandemic, it’s how quickly things can change. Case in point: The unemployment rate rose from 3.8 percent in February 2020 to 13 percent in May 2020. A broad economic event like a pandemic can affect employment, as can changes in sectors and within individual companies. In other words, many Americans are at risk of finding their income unexpectedly reduced, if not ended altogether.
When income fluctuates, expenses typically don’t. This can kick off a cycle of delinquency on bills and debt, which can force people to look into options like debt relief programs and, as a last resort, bankruptcy.
#3. Divorce/Separation
Divorce can be very costly in and of itself, with a median price tag around $7,500. Attorneys’ fees and court filing costs can add up quickly too. Even if the divorce is uncontested and relatively inexpensive, there’s still the fact one or both partners may find their financial situation drastically changed. This can make it difficult to keep up with living expenses, child support and debt responsibilities.
#4. Credit Card Debt
Credit card debt is particularly tricky because it tends to carry high interest rates, often between 15 and 25 percent. This interest also compounds over time, which means the interest gains interest right along with the principal balance. When credit card debt accumulates over the course of months or years, it can be very difficult to annihilate without taking drastic measures.
The reasons Americans declare bankruptcy are as diverse as the people filing for it. It’s important to remember that many people end up entering bankruptcy protection for reasons somewhat outside their control, and that it is possible to rebuild your financial life — and credit score — after filing with dedication.
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