Causes of Bankruptcy

There are many factors that can lead to bankruptcy, some that are beyond the debtor’s control. This post discusses some of the sources of financial distress that most often affect clients who come to us for help with their bankruptcy filings.

Business Difficulties

According to data from the Bureau of Labor Statistics (BLS), around 45% of new businesses fail within their first five years of operation.

Many of our clients rely on their business as their only source of income. While self-employment offers flexibility and control, it also comes with a large degree of risk, particularly if you personally guarantee business debts.

Filing bankruptcy as an entrepreneur involves special considerations. For example, as a business owner, you may be able to opt for Chapter 11 bankruptcy, though this is often more complex than a Chapter 7 filing.

If you’re in financial trouble because of difficulties with your business, please visit our Entrepreneurs Filing for Bankruptcy page for more information.

Medical Bills

Another common cause of bankruptcy is medical bills. Nowadays, even co-pays for emergency or specialized care can amount to hundreds or even thousands of dollars, and for those who are uninsured, trips to the doctor can sometimes cost patients multiple thousands of dollars. The cost of medical treatment for a serious injury is often compounded by the partial or complete loss of income while you’re out of work recovering from the injury.

Divorce or Separation

Divorce and separation generally lead to some degree of financial hardship; in some cases, this can be sufficient to overwhelm one or both spouses and lead to a bankruptcy filing.  It goes without saying, but going from one household to two is expensive.

Divorce-related legal fees alone can cost thousands of dollars. Then, there’s the division of assets and debts to consider. If one spouse is left with a larger portion of the marital debt, or a mortgage on a home they can no longer afford on a single income, their situation can quickly become untenable. Additionally, the requirement to pay alimony or child support can further strain finances.

It’s worth remembering that amicable divorces tend to cost less. If you and your spouse are considering parting ways, you should try to reach a compromise without fighting over fine details in the courts. This is doubly important if you share children with your spouse, as it can be very stressful for younger kids to watch their parents go through an antagonistic separation.

Additionally, it’s important to consult with a divorce lawyer as early as possible in the process. An attorney will ensure that your rights are protected and guide you on how to keep costs as low as possible.

Student Loans

A student loan can be a sensible investment that boosts your career, but it can also cause major financial distress if it doesn’t lead to increased earning power. Many of the people who come to us do so because of unmanageable student debt.

The cost of higher education has skyrocketed in recent decades. Although student loans are not easily discharged in bankruptcy, it is possible to relieve other debts in this way, thereby making it easier to repay student loans.  Student loan payments are typically suspend during a bankruptcy.  While this will not eliminate your debt, it will give you an opportunity to restructure your budget in a way that will make it easier to succeed upon completion of your bankruptcy case.

Reduced Access to Credit

Many people rely heavily on credit to manage cash flow. If your access to credit is suddenly cut off, you may find yourself unable to meet your financial obligations. This can happen for various reasons, such as a drop in credit score due to missed payments, economic downturns leading to tighter credit markets, or changes in credit policies by lenders. Bankruptcy may become the only viable option to discharge unmanageable debts and start anew.

Cost-of-Living Increases

In recent years, the prices of essential goods and services like housing, healthcare, food, and transportation have eroded the financial stability of millions of Americans. If your wages remain stagnant, or do not increase in proportion with your cost of living, you may be forced to rely on credit to make ends meet. Additionally, an unexpected expense (such as a medical emergency or car repair) could push you into financial crisis if you’re already living paycheck to paycheck.

Bankruptcy can provide relief by discharging certain debts or by allowing individuals to restructure their finances in a way that better aligns with their income and the current cost of living.

Contact Our Alabama Bankruptcy Lawyer Today

If any of the factors we’ve discussed have already resulted in creditor actions against you, it’s time for you to be proactive. Creditors have a few methods they can use to collect debts. A creditor might, for example, send you letters and phone calls regarding your account. If that doesn’t work, they might file a lawsuit in small claims court. If they receive a judgment in their favor, then they can either garnish your wages or they can refer your case to a collections agency. For more information about how creditors can collect on debts, please visit our Debt Collections by Creditors page.

If you’re in financial distress, Grainger, Hawley & Shinbaum can meet with you and help you determine if bankruptcy is the right decision for you. We strive to put our clients in the best possible position to get out of the hole and get their lives back on track. We serve clients from our offices located in Montgomery and Prattville, Alabama.

Call us at (334) 260-0500, (334)361-7750 or contact us online to schedule a free consultation with Charles Grainger, Brad Hawley or Richard Shinbaum.