What Are The Triggers That Force Someone To File For Bankruptcy?
The three common triggers for bankruptcy are unemployment, medical expenses, and divorce. Unemployment can trigger bankruptcy, which is pretty straightforward. When I say unemployment, I also group under-employment in that category as well. Under-employment is when your hours are reduced or not being able to find a job in your career field. Or maybe previously you had the job but lost it, and now you cannot get back to that level of income. That happens, and even though we have had some recovery since the economic recession of 2008, it has not been quite as good as the politicians would have you to believe. Unfortunately for a lot of people who were left in the dust, most of these jobs no longer exist. In 2008, the sky started falling, the economy was crashing, and a lot of big employers out there cut thousands of jobs because they had to.
Since 2008, the economy is slowly coming back and a lot of these same corporations that laid off thousands of employees are not hiring those same people back. Instead, they have been holding on to the cash and capital. Many corporations out there have more capital today than they did in 2008. They have bounced back just fine, but they are leaner and meaner because they do not have the same labor expenses that they used to or are outsourcing those jobs overseas now at a reduced expense. They have reworked their business models so that they do not have to spend as much on the labor.
That is not 100% consistent across the board, but when a few larger corporations do that across the country, that leaves a lot of people out in the lurch. They cannot find the job that they used to have as a supervisor or a manager. What has happened is now they have accepted a position that is an hourly job making maybe 70-75% of what they used to make. Imagine if you have a family to support, it really is a hard choice to work 60 hours a week to catch up your income and miss all that time with your family.
At some point, you have to step back and take a look and say, “Okay, what do I need to do to change this situation? Can I keep working sixty hours a week for the next six or seven years to get this debt paid off? Does that make sense or can I negotiate with these creditors and maybe be able to pay forty percent of the debt? Is that going to work, and what are the tax consequences of that? Or does it make sense to exercise my bankruptcy options?”
For a lot of people who have medical debts, that is just random luck of the draw. You could be diagnosed with something that you have never even thought of before and it can completely change your life, or you have a child with special needs that can create a large amount of medical bills. If you find yourself in that medical quagmire, you really get hit on both ends because not only are your expenses growing dramatically, but it becomes more and more difficult to generate the income to keep your head above water. Not only meet the monthly expenses that all families have, but tend to also chip away at these medical debts.
With divorce, it is a very emotional time in most people’s lives. Many of the decisions being made prior to and during the divorce are based on emotion and a difficult thing to do. During the divorce, a lot of people do not stand back and consider the consequences of the divorce. People do not make the decision that they get divorced based on a rational breakdown of how you might make a business decision, it is very emotional. One of the consequences that people might not be paying attention to after the divorce that becomes very real is if both spouses are working in a household and one spouse leaves, the income for the household is going to drop dramatically, and even if there is child support or spousal maintenance, it is not the same, it is not 100% of what the former spouse was bringing into the household.
Many times, people go through divorce in such a hurry with such a preconceived notion of what things are, such as debt load from the marriage, that they might not split the debts in a way where the new monthly budget makes sense. Some spouses will go into debt and use credit cards to supplement the other income that the former spouse was bringing in. Divorce is another situation, where if you are not careful, you can get hit on both ends. Because if you had debt from the marriage that you were paying on and maybe it is only in your name, but it was obviously stuff for the family, but the former spouse is gone and the credit cards are not in that person’s name, so they are not making payments on it: you might get stuck holding the bag.
On top of all of that, in order to have enough money to buy groceries after the mortgage is paid or after the car payment is paid, you are putting things on credit and using that as a crutch that can grow the debt as well. That accrues interest as well. What can happen after people have been struggling post-divorce is people get to this point where they sit down and look at the numbers and say, “I can’t keep going forward like this; I’m just digging myself deeper and deeper into the hole.” Again, it is a situation where people can sit down with us for a free consultation and we will layout all their options are the pros and cons of each: both bankruptcy and non-bankruptcy.
A lot of times, people will say, “Well, I didn’t even realize that is what bankruptcy could do. I just thought bankruptcy meant I was going to automatically lose the house. I thought bankruptcy meant I had to give up the car. I thought bankruptcy meant I might get fired. I thought bankruptcy meant I could not use a credit card for ten years and my credit would just be destroyed.” That is not the case. Most people find that when you cut through those myths and take an honest look at your situation and what bankruptcy can do for you, it can be a very powerful tool to help you resolve your debt situation. That is really important not only for the obvious financial reasons, so you are able to support yourself and your family. But also the emotional strain that debt can put on someone who cannot afford to pay, it is a strain on everyone and bankruptcy helps take that stress away as well.
I’ve sat down with people, who are not yet divorced, but they are separated and it is pretty obvious to me that one of the things that led to the decision to divorce was the debt burden that the couple was dealing with. It was creating so much stress in their lives and they were arguing so much over what they were going to do about the $50,000 credit card debt that they have. It caused a rift in their marriage and it was something that they unfortunately could not come back from. If they would have taken the time to look at bankruptcy earlier, maybe the circumstances could have been different.
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