Why Do People File for Bankruptcy? (2024)

FAQs

Why Do People File for Bankruptcy? ›

Bankruptcy can often reduce or eliminate your debts, save your home, and keep bill collectors at bay. But it also has serious financial consequences, including long-term damage to your credit score.

A bankruptcy filing is intended to provide breathing room for individuals to get their affairs in order and, usually, to develop a plan to pay creditors. The goal of a bankruptcy is to give a debtor a “fresh start,” so that the individual is not weighed down by those liabilities forever.

Common reasons that people file for bankruptcy include loss of income, high medical expenses, an unaffordable mortgage, spending beyond their means, or lending money to loved ones. Often, bankruptcy is a result of several of these factors combined.

Bankruptcy Helps Improve Credit Scores

However, once you file bankruptcy, debts will be discharged or you will have a payment plan you can stick to. This will make it a lot easier to manage your finances and eventually get out of debt, which helps improve your credit score.

Wage garnishments and bank account levies will be stopped, and aggressive debt collectors will no longer be able to call or send you collection letters. Covered debt collectors will stop their activities and give you the peace of mind you deserve.

Bankruptcy can often reduce or eliminate your debts, save your home, and keep bill collectors at bay. But it also has serious financial consequences, including long-term damage to your credit score. That, in turn, can affect your ability to borrow in the future.

Bankruptcy is a way of getting relief when you find yourself overwhelmed by debt. Unfortunately, in addition to being overwhelmed, many feel anxious and embarrassed about admitting that they need the type of debt relief bankruptcy provides. There is no reason to feel embarrassed about filing bankruptcy!

Chapter 7 and Chapter 13 bankruptcy are the most commonly filed types of bankruptcy, likely because they're available to individuals.

Many people prefer to file for Chapter 7 because it's quick, with most people receiving a debt "discharge" eliminating qualifying debts in about four months. Also, filers can usually keep all or most of their property, and don't pay into a three- to five-year Chapter 13 repayment plan.

At what point is bankruptcy worth it? ›

“But if creditors are starting to grab at assets, wages, attach your car, grab money out of your bank accounts … at that point unless you can reach agreement with them it probably makes sense to consider bankruptcy.

The fact that bankruptcy stays on your credit report for 7-10 years can mean paying higher interest rates on loans, assuming you'd qualify. Filers can rebuild credit over time by managing debt smartly. The best place to start is by making on-time payments and bringing past due accounts up to date.

Although bankruptcy can make sense for your overall financial well-being, it can take several years to rebuild your credit history. As a result, you may need to put certain financial moves on hold until you can qualify for better terms. You can lose some of your assets.

For example, you can't discharge debts related to recent taxes, alimony, child support, and court orders. You may also not be allowed to keep certain assets, credit cards, or bank accounts, nor can you borrow money without court approval.

The five states with the most bankruptcy petitions in 2022 accounted for 31% of the year's filings nationwide: These states and the number of bankruptcies declared in 2022 are as follows: California: 31,792. Florida: 26,724.

Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time.