What leads people to file bankruptcy? A recent article from the Idaho State Journal offers an interesting peek into the mind of a U.S. bankruptcy judge and a refreshing reminder about the causes of bankruptcy.

Why Americans File for Bankruptcy

U.S. Bankruptcy Court Judge Jim Pappas explained how bankruptcy protection is one of pillars of the U.S. economic system: the promise of a fresh financial start for those who get into more debt than they can handle encourages the sort of entrepreneurship that makes America what it is.

Pappas went on to identify three factors that he has reportedly found contribute to the majority of bankruptcy cases he sees in his court:

• Medical bills: Medical catastrophes can bankrupt even those who have medical insurance—having too little insurance can be just as problematic as having none at all when astronomical medical expenses enter the picture. Plus, lost work hours and/or the lost ability to perform many jobs leaves some people without a chance to recover from a financial setback.
• Job loss: As millions of Americans have learned in the last year, getting laid off or having your hours or pay cut can seriously strain your finances. For people who don’t have a tidy emergency fund in place, job loss often throws finances into turmoil—without steady income, people risk defaulting on credit cards, home loans, car payments and student loans. This can lead to stress, foreclosure and repossession—for many, bankruptcy is the only available remedy.
• Family problems: Divorce can be expensive, and single parenting isn’t much easier. Apparently, the majority of single filers Judge Pappas sees are women, often strained financially by their obligation as the primary caretaker for their children.

Why the Bankruptcy System Works

One point mentioned in the article bears repeating: the judge mentions that bankruptcy still has a bad reputation in this country as being for “deadbeats” and people who are interested in “gaming the system.”

But, according to anecdotal evidence and statistics from the U.S. government, nothing could be further from the truth. In fact, only an estimated one to three percent of bankruptcy filings are fraudulent—meaning that between 97 and 99 percent of bankruptcy filers are truly in need of financial protection.

If you’re struggling financially—whether because of one of the factors mentioned above of for another reason—you may want to consider whether filing bankruptcy is the right choice for you. Often, taking action earlier rather than later gives filers the most options for financial recovery.
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