Why does bankruptcy happen? | Cohn Lifland Pearlman Herrmann & Knopf LLP
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Why does bankruptcy happen?

Bankruptcy is something that can happen to anyone. Even those who do careful financial planning can find themselves facing unexpected events that they never could have anticipated. It's always a lingering threat in a society that is so driven by money.

To help paint a picture of how it happens, here are a few of the top reasons.

1. A reduction in income

This can mean two things. For a business owner, it could just mean lower sales numbers. Someone may make $100,000 per year for five years in a row, get used to living at a certain level, and then see the business tank when a competitor enters the market. If the next year sees income of just $20,000, they can get into a lot of debt, very quickly.

For those who work for other companies, the reduction in income could either relate to having fewer hours or the complete loss of a job. That's not always their fault. The company may struggle financially and decide to downsize the workforce. It's easy to assume that income is forever, but it's not.

2. Medical expenses

Insurance doesn't always cover everything. Plus, some people don't have adequate health insurance or lack coverage altogether. Some illnesses and injuries are incredibly draining, financially speaking. You could put aside money for years, get cancer, and see your life savings evaporate quickly. It's unfortunate, but it does happen. 

3. Mounting unplanned expenses

Sometimes, it not a single big event that leads to bankruptcy, like the loss of a job or the onset of a disease, but just a string of expenses piling on top of one another. The car breaks down. A pipe breaks and floods the house. You have to pay back your student loans. You get sick and miss a paycheck at work. When everything happens at once, you may not be able to weather the storm.

4. Credit card issues

Credit cards don't have to lead to debt. You can spend just enough to pay off every month. The problem is that people often don't, either because they make a mistake or they have an emergency and don't see any other options. Credit cards have high interest rates. The debt can accumulate quickly and may feel impossible to eliminate once it's incurred.

Your options

If you are facing debt for any reason, you need to consider all of your options. Bankruptcy may be one of them. Make sure you know what steps to take and what rights you have.

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