With a wide lens, it’s clear that issues between assets and liabilities cause bankruptcy. Someone takes out debt that they can’t pay back, for instance. They have more debt than they have assets or earnings, so they have to use bankruptcy to get out of it.
But this is just a very basic way to think about how and why bankruptcy happens. What you really want to consider is why that individual had more debt than they could handle. That is the event that actually caused the bankruptcy. So what are some of the top causes?
Perhaps more than anything else, Americans declare bankruptcy because of medical debt. This is the type of debt that can come on suddenly, you may feel like you have no choice in taking it out – such as when you’re paying for life-saving treatment – and it could be more debt than you’ll ever be able to pay off in your life. It certainly doesn’t mean that you did anything wrong, but medical debt can mean that you need a financial solution.
Additionally, most people have some level of debt at all times. They just try to pair it up with their income to make sure they can pay it off every month. But a sudden reduction in that income, either through job loss or a reduction in hours or pay, can suddenly make that debt seem to be an insurmountable barrier. Yet again, you may feel like you’ve made wise financial decisions, but you still find yourself in trouble.
If you do end up facing bankruptcy, make sure you know that it’s a very useful tool and that you understand exactly how to use it.