The Biggest Cause of Bankruptcy in the United States
No one intends to go bankrupt. However, applying for credit is one of the ways that Americans have found to manage the dream of owning a home and a car, and providing an education for their families. However, bankruptcies continue to be a common occurrence. Why is this happening, especially to the middle class, who seem to be continually at risk? Looking at the key factors that homeowners and families are facing will tell you exactly where the money is disappearing to. If you currently own a home, pay special attention to these areas, because this is where risk is at its highest in producing a debt slide from which there is very little escape.
Decrease in Job Security and Income
One of the main areas in which the middle class is suffering from a decline is in their jobs. Simply put, stagnating incomes and job insecurity make working for a living less of a reliable way to keep out of debt. Over the past 20 years, income levels have steadily decreased, which deeply affects the ability of these workers to pay off mortgages that were secured in pre-recession years. Worse yet, getting laid off or being terminated leads to a loss of income that makes paying down debt nearly impossible, especially if there is no severance package to rely upon, or an emergency savings fund to draw from. The loss of a job may also mean the loss of insurance coverage, which leaves the recently unemployed, as well as his or her family, greatly exposed to medical debt.
Too Great a Reliance on Credit
Financial planning that does not take into account the ups and downs of one’s financial stability can lead to an excess of credit debt and this, added to excessive spending habits, can contribute to a downward spiral. Some plans that include a debt consolidation component in the form of home-equity loans may only be a temporary solution if spending continues at the same rate as ever. Soon, the debtor finds himself or herself under threat of foreclosure, and bankruptcy may become the only escape. Unexpected expenses add to the weight of financial need, and issues such as medical bills or property damage due to a flood or earthquake can quickly put the homeowner in a precarious financial position.
Drum Roll Please: Medical Debt Is the Main Culprit
More than any other expense that affects the economic stability of the American worker is medical debt. Despite the faith in health insurance, recent studies show that 78% of bankruptcy cases incurred medical expenses while actually having some form of health insurance. Exorbitant drug co-pays mixed with extended hospital stays can culminate in an enormous amount owning, forcing homeowners to draw from savings accounts and home-equity loans that quickly deplete. In worst-case scenarios, a sudden or unexpected illness due to a disease or an injury creates an immediate depletion in funds causing a complete financial meltdown. Relying on credit cards to pay for emergency procedures is often the only resort, but this may only be adding to the snowball effect of debt problems. One option is to consider looking at a credit card that is specifically designed to pay for such services in order to take advantage of low initial interest rates.
The American dream relies upon both a healthy credit score as well as a reliable income. During these times when neither is easily achieved, it makes sense to develop a plan to deal with emerging issues. With a sober examination of your spending and your current debt load, you will be able to develop a better understanding of what risk you’re running and take steps to put a plan into action.