Some may view bankruptcy as a reasonable way out of debt and an opportunity for a fresh start. The damage bankruptcy does to your finances, however, is life-disrupting and lasting.
If you are considering filing for bankruptcy today, in addition to having to jump through many legal hoops, you have to be prepared for your credit score to take a significant and long-lasting hit.
How Many Bankruptcies Are Filed?
Despite the credit score damage incurred, hundreds of thousands of people all over the US file for bankruptcy when unable to pay off their debts.
By the end of August 2020, the Administrative Office of the US Courts reported 380,335 cumulative bankruptcy filings, according to data published by the American Bankruptcy Institute. Of these, 68 percent represented Chapter 7 filings, and 29 percent were Chapter 13 filings.
Despite the large numbers, 2020 has actually seen a 27 percent drop in bankruptcies, compared to the same period of 2019.
How do people find themselves pushed into bankruptcy? The reasons are diverse and many, but there are some obvious trends. According to Investopedia, the top five reasons for bankruptcies are:
- Medical expenses
- Job losses
- Credit card debt/loan debt
- Unexpected expenses
Unmanageable Medical Expenses
According to an American Public Health Association report, despite the Affordable Care Act, more than 66 percent of US bankruptcy cases occur as a consequence of medical expenses.
Medical emergencies can happen unexpectedly, giving families little or no time to prepare financially for a major medical expense. Further, medical costs often coincide with job loss, which can occur when a medical condition or injury makes a person unable to work. Skyrocketing medical costs in the hundreds of thousands of dollars can make short work of savings, leaving families to believe that bankruptcy may be the only way out of crippling debt.
Unanticipated Job Loss
Whether it comes as the result of a layoff, a sudden disability, or a termination, a job loss usually means the loss of one’s main source of income. In some cases, a severance package may cushion the blow, but severance packages are meant to tide one over from one job to the next, not to sustain one's standard of living for any length of time.
In a job market where unemployment rates are at historic highs and competition for open positions is fierce, finding another job may not be easily or quickly accomplished. Deprived of income and lacking emergency savings, people may soon find their finances devastated. In such a circumstance, bankruptcy may seem to be an option to consider.
Mounting Credit Card and Other Unsecured Debt
It is not unusual for consumers to have more than one credit card. According to Experian's 2019 Consumer Credit Review, the average American has four credit cards and carries an average credit card balance of $6,194.
While it is possible to use credit cards responsibly, it is also very easy to fall into a habit of carrying a balance on cards, making impulse buys or indulging in retail therapy, or simply losing track of where and how often credit purchases are being made.
This can, in turn, lead to actions such as paying off one credit card with another, missing payments, making only minimum payments, and so on. Each of these actions comes with additional interest, fees, or penalties, exacerbating the problem. When credit card debt and other unsecured debt spirals out of control, it is very difficult to regain control without some type of intervention. Bankruptcy is one of many options people consider in this situation.
Divorce or Separation
Divorce is, without a doubt, one of the most financially taxing processes a person can encounter. It turns the finances of those involved upside down through legal fees, child support payments, alimony payments, and the costs of keeping up two separate households.
In some cases, the divorcing parties may feel stressed and forced into a position where bankruptcy feels like the only way out of a financial bind.
Unexpected events are a part of life, and sometimes those events are incredibly expensive. Natural disasters, theft, burglary, and lack of insurance can combine to rob some people of their assets in the blink of an eye.
Alternatives to Bankruptcy
Though each of these life situations may seem like valid times to consider bankruptcy, it pays to stop for a moment and think about other options that may be available to you. Bankruptcy should be considered as a last-ditch debt relief option because of the significant impact it will have on your credit score. You owe it to yourself to examine other options before you choose bankruptcy.
Like bankruptcy, debt settlement enables you to pay less than you owe and still get out of debt. It also affects your credit score negatively, but the extent of the impact is dependent on a number of factors such as the condition of your credit before settlement, the reporting practices of your creditors, the size of the debts you’re settling, and the account status your creditors choose to list on your credit report after a settlement is negotiated.
To understand how debt settlement could work in your case, simply call one of our ClearOne Certified Debt Specialists at 866-481-1597 today. Our Certified Debt Specialist will discuss your debt relief options, answer your questions, and give you a personalized debt relief plan.