One of the most common misconceptions about personal bankruptcy is that the people who file are usually those who make irresponsible financial choices. Especially prior to the Great Recession of 2008, people tended to visualize someone who shops compulsively or has expensive tastes on a minimum wage income when thinking about individual bankruptcy filers.
However, the truth about bankruptcy is that it might be the best solution for people in many circumstances, including those who have historically been very responsible about their finances. Even adults who make a decent wage are often only one serious personal incident away from needing the protection of bankruptcy.
What leaves people vulnerable to bankruptcy?
Many people live paycheck-to-paycheck, even when they make reasonable wages. Rising costs and also increasing standards of living have left many people, including successful professionals, unable to set aside much money in savings. Instead, most of their monthly income goes directly toward household expenses.
Then, when a situation arises that generates unexpected costs or leaves them without income, these typically responsible people may find themselves falling farther and farther behind on their financial obligations. All it takes is a layoff, a car crash or a cardiac event to leave them with growing debt and no way to repay it all. What people have in savings won’t be enough to cover those sudden costs or replace lost wages when they lose a job.
Those under the age of 35 have a median savings account balance of just $3,240. Older adults don’t necessarily fare much better. Researchers found that those between ages 35 and 44 had median savings account balances of $4,70, while those ages 45 to 54 had $5,620. Those over age 55 but under the age of retirement had a median savings account balance of $6,400. Depending on someone’s monthly budget, that may not even be enough to cover their mortgage and their household grocery bills for the month. Even those with slightly larger savings accounts will find themselves struggling to make ends meet if their hardship persists for more than a few months.
The majority of bankruptcy filings are the result of medical issues, job loss, providing financial assistance to family members and divorce. Instead of avoiding bankruptcy because of the social stigma that had long been associated with it (even though it is far less pervasive than it once was), many professionals would benefit from taking action and resolving the debts that have grown beyond their ability to manage. Learning more about personal bankruptcy can ultimately be a life-altering choice in the best possible ways.