Most of us who have never experienced serious financial difficulties might look at someone in a bankruptcy scenario and wonder what's going on. We may have a hard time grasping how things could get so bad financially that a person would have to go this route, nonetheless it happens. When it comes to the reasons, there are as many as there are cases in bankruptcy court. Yet there are some that are more prevalent than others. Below we've listed three of the most common scenarios leading people to feel as though declaring personal bankruptcy is the only way out.
Overwhelming Unsecured Debt
When you break down all of your debt into simplest terms it can be categorized into one of two types: secured and unsecured. Secured debts are debt backed up by personal property which can be seized by a creditor in case of default. Good examples of secured credit are mortgages and auto loans. Unsecured credit on the other hand has no real property backing it up which leaves a creditor no recourse if you don't pay your bills. Credit cards, health care bills, and other such things are good examples of unsecured debt.
Unsecured credit is among the top reasons people declare personal bankruptcy - because it's easy to get overwhelmed. A common scenario will see someone over extended on their credit cards to the point where they are unable to make even the minimum monthly payment. Rather than cut up the credit cards and take a second job, there's a big temptation to simply get another credit card and transfer some of the balances of other cards to it. When this cycle is repeated two or three times it quickly becomes apparent that an individual cannot make the payments.
Since credit card debt is unsecured a bank will turn your debt over to a collection agency who begins to chase you relentlessly for payment. They will call you at all hours of the day, send threatening letters several times per week, and even hassle you if they can find out where you were. The pressure of this cycle causes many people to be completely overwhelmed and declare personal bankruptcy.
Extended Unemployment
Unfortunately, unemployment is a lot more prevalent in America today than it's been in a long time. It's no longer uncommon for individuals to be laid off for years at a time, with no reasonable hope of finding a quality job. Equally unfortunate is the fact that unemployment benefits very rarely match the income an individual earned from his or her job. Furthermore they are also temporary. And therein lays the trap.
Individuals who face a layoff oftentimes find themselves in trouble when their unemployment period is extended and they have not cut their budget. In fact, this occurs over a long period of time without them even realizing it's happening. How, you may wonder?
When a layoff first begins the tendency is to not reduce spending in the hopes that a new job will be found soon. When a new job becomes harder to find than you planned, savings are used up, retirement plans are cashed in, and credit cards are maxed out. Once the unemployment checks stop coming many people find they have no other choice than to go to bankruptcy court.
Bad Investments
Our last reason for declaring personal bankruptcy has to do with bad investments, usually in real estate or other risky business ventures. Small businessmen and self-proclaimed entrepreneurs can easily fall into this trap if they don't take the time to thoroughly investigate their investments and come up with a solid business plan. Once a business goes south, it's very difficult to recover it without the help of other investors. Yet it's a double-edged sword when you consider finding new investors for a failing business is nearly impossible to do.
Making matters worse is the hope that the next investment will turn fortunes around and get the individual back on track. A series of several bad investments in a row is almost akin to a gambling habit for many people in this position. With every successive bad investment finances get worse and worse until bankruptcy court is the only solution.
Sometimes individuals will find themselves declaring personal bankruptcy just because of a string of bad luck that they have nothing to do with. Unfortunately, this is the rare case. For the most part personal bankruptcies are caused by bad choices on the part of the individual. As any bankruptcy court will tell you, most bankruptcies are entirely avoidable by simply making wise financial decisions.
If you find yourself in a position where you're thinking about filing for bankruptcy, you might want to try a debt settlement service first. A debt settlement service will contact your creditors on your behalf to work out payment arrangements while helping you develop a plan to pay off your debts. Often times they can reduce your debts to pennies on the dollar, depending on the creditors you're dealing with. If not, they'll at least be able to reduce your monthly payments and work with your creditors to establish something you can afford. Even if it takes you years to work out of your financial problems this way, it is still better than declaring personal bankruptcy.