Why People File for Bankruptcy

If you're struggling with debt, you may sometimes find yourself wondering if you should file for bankruptcy. If you're like most people who wonder about doing this, then you don't - but why? Well, one reason that many people don't file for bankruptcy is because they don't know if they are in a position to do so.

There are actually many different reasons that people file for bankruptcy, most of which involve common sense like the loss of ones job or overwhelming medical bills - and not laziness. Other reasons may surprise you, with one being that you may actually be able to improve your credit score by doing so! In any case, if you feel like one of the reasons below could apply to you, you may want to consider filing for bankruptcy yourself.

Reason #1: Loss of a job

One of the most common causes for why people choose to go bankrupt is because of a job loss. It is hard to find a job in today's market, and if you are already struggling with debt, the loss of your job can come as a major blow. Not only will you lose the money provided by the job, but other things as well. This includes things such as medical benefits, insurance, bonuses (such as access to a company vehicle), or discounts which also came with the job.

Reason #2: Preventing repossession of properties

If you file for a Chapter 13 bankruptcy, you might be able to force creditors to return property (such as your car) back to you. Your past missed payments will be consolidated into your bankruptcy plan, and you will give monthly payments to the trustee of your bankruptcy plan, and who will in turn pay the finance company on your behalf.

It is important to remember that repossession of properties is only possible under a Chapter 13 bankruptcy and NOT a Chapter 7 bankruptcy.

Reason #3: Improving your credit score

There are actually some cases where filing for bankruptcy can help you improve your credit score. To use an example, it is possible for someone with a credit score of 450 to raise their credit score as high as 700 if they meet certain requirements.

This is because when you file for bankruptcy your score is determined based on how you well you do compared to other bankruptcy filers. In other words, your score is matched against people in similar situations as you, not against people with perfect credit scores and zero debt.

As long as you manage your bankruptcy plan well and manage to meet its minimum payment obligations, then it is possible to raise your credit score. Keep in mind, though, that you cannot raise your score to an 850 (or close to it) so long as you are registered as being bankrupt.

Also, if you file for bankruptcy when you have a high credit score (which is not advisable, because doing so would indicate that you have other options available to you) then doing so may in fact harm your credit score. It is also advisable consider other means of raising your credit score before filing for bankruptcy.

Reason #4: Stop home foreclosure and catch up on missed mortgage payments

Filing for Chapter 13 Bankruptcy will stop foreclosure before bidding or sales will occur. This gives you time to repay mortgage arrears or your remaining mortgage balance. It does not eliminate your property mortgage.

Reason #5: Put a halt to creditor harassment

It doesn't sound like a major reason, but if you're struggling with debt and receiving rude and harassing calls on a daily basis, the pressure can sometimes be too much. People can only deal with so much stress before something gives way. Sometimes the best option to get rid of the calls and the stress is to file for bankruptcy.

If you are in this situation please remember that if there are other options available to you, take them! Bankruptcy can get rid of the creditors, but don't file for it unless your debt, credit score, and overall financial situation seems hopeless and impossible to work off.

Reason #6: Medical bills

Medical expenses have caused many families to file for bankruptcy. Whether you are middle-class, low-class, or somewhere in-between, the cost of medical treatment is steep and scary. One of my own close friends is currently struggling to pay a bill that her insurance didn't cover, and she only had a doctor remove a piece of food that had gotten lodged in her throat.

If you're in a situation where you're being crushed by paying a medical bill off and your financial state is in ruins, then filing for Chapter 7 bankruptcy can help you to reduce or possibly even eliminate your medical bill.

Reason #7: A new start

After you have filed filed for bankruptcy and completed the payments that you are responsible for under it, some people have found that it gives them a fresh start. This is not to say that your slate gets wiped clean - you can have the fact that you filed for bankruptcy on your credit report for ten or more years.

However, you will be: out of debt, free of creditor harassment, and (hopefully) have a higher credit score than you did before you filed for bankruptcy. All of these things can help you to feel better about yourself, and provide you with a figurative goal or 'light at the end of the tunnel'.


At the end

Hopefully these reasons will help you should you be in the position where bankruptcy seems like a possibility. Remember though... Filing for bankruptcy should be your last resort. If you have any other option (such as cutting your budget) you should definitely take it.

Also, before you file for bankruptcy, you should consult with a credit counselor to determine whether or not it would be in your best interests.


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