Have ever wondered what someone who files bankruptcy looks like? Does he or she look like the homeless guy begging for money at the freeway exit? Are they young, old, somewhere in between? Do you imagine they look sad, hungry, and ashamed, or are they happy, fat, and smug at having gotten away with not paying their debts?
As a Bankruptcy attorney, I cannot sit in judgment of the people who come into my office for help. I have found that almost without exception, every person considering filing bankruptcy has a horror story to tell about how they found themselves in overwhelming debt, and despite trying many ways to solve their financial problems, bankruptcy was their only real choice. And on the other hand, I see many people whose only real choice to move on with their life is bankruptcy, who will not accept reality and deplete their retirement, go without necessary medical care and otherwise jeopardize theirs and their family’s health, well being and safety to avoid the stigma of bankruptcy.
People who file bankruptcy are seldom poor or young. Neither the poor nor the young can get access to enough credit to need bankruptcy. The poor often qualify for free medical care, and although it is less likely (although not impossible), young people seldom require expensive hospitalization or other expensive medical debts.
The five most common reasons I see why someone has to file bankruptcy are:
1. They lost a job, often after many years at the same company, their work hours were reduced because of a decline in employer’s business, or their wages were reduced as part of an employer’s mandatory cost cuts.
2. They sustained a serious illness or injury, usually requiring a hospital stay, either not covered by insurance, or which was so substantial, that the co-pay amounts exceeded $20,000.
3. They had invested in real estate.
4. They started a business or self employment without sufficient money or without having access to accounting, management, or marketing skills.
5. They Co-signed on a vehicle loan.
Anyone affected by the economic downturn who has lost their job or had their wages or hours reduced may need bankruptcy. Someone out of work for more than three months cannot possibly get back on their feet afterwards if they have a significant amount of debt. Especially for people who are accustomed to making an above average income, it becomes impossible to continue making the car payment, paying car insurance and for other living expenses, on a substantially reduced income, such as when receiving unemployment insurance. When someone can’t pay their debts, or pays debts late, instead of working to allow reduced payments, creditors impose late fees and raise interest rates. As a result, the debts of someone who is unemployed typically increase just at the time when they can least afford to pay. If the period of unemployment is lengthy, people can lose their medical insurance, and those who are eligible to keep their health coverage many not be in a position to pay for it due to their limited resources.
Anyone, even someone fully employed and with good health insurance, but unfortunate enough to suffer a major medical problem or accident, or have a child with a medical problem, could easily need bankruptcy to avoid a wage garnishment on debts that are too overwhelming to ever pay. Someone without health insurance may be denied non-emergency medical care and may be responsible to pay overwhelming debt related to medical treatment within a frighteningly short period of time.
Of course, most people who purchased real estate in Nevada are now underwater on their property. Other than trying to save their credit, there can be very little motivation to continue paying when the payments go up or a balloon note becomes due. With many people out of work or experiencing a pay freeze or cutback, hanging on to real estate may make no sense, and may be virtually impossible for those who wish to do the right thing.
With the loss of jobs and other problems facing working people, some have responded by starting a business in order to have more security. Others may be forced into self employment as employers reclassify workers as “independent contractors.” These ambitious workers often lack sufficient capital to make their business profitable, or they may have unrealistic expectations ofwhat is necessary to be successful. Without specialized training in how to run a business, someone perfectly capable of performing quality work may lack the tax, marketing or other demands to establishing and run a business. Money is seldom available to consult with qualified professionals to get the new business off the ground. As a result, unless the business is quickly profitable (which is unlikely), it may fail, leaving the owner responsible for more debt.
In order to keep a job, showing up on time requires any worker to have dependable transportation. A young person without credit or an older person who has lost their ability to obtain vehicle financing may approach a family member or friend with a request for help in getting a vehicle. A request like this can be hard to deny, but often the person making the request has grandiose expectations about their ability to repay the loan and wants a vehicle far more expensive than they can realistically afford. In this situation, if the vehicle gets repossessed, which often happens, the responsible family or friend may be left with a huge debt to repay. Since creditors often file suit after a vehicle repossession, depending on the amount of the vehicle debt, the responsible person may end up having to either face a wage garnishment that takes 25% of their income away, versus filing bankruptcy.
It is a mistake to assume that someone who files bankruptcy is at fault. The face of someone who files bankruptcy looks a lot like your own face. But a lot more worried.