What are the reasons why people file for bankruptcy?

On Behalf of | Sep 16, 2021 | Bankruptcy |

The federal bankruptcy courts handle a significant number of cases each year. A California resident may face significant financial struggles and wonder if bankruptcy provides the appropriate solution. Understanding why so many people file for bankruptcy can help someone make decisions about their own financial future.

Reasons for seeking bankruptcy protection

One compelling reason people file for bankruptcy centers on their inability to pay massive debts. Their inability might derive from having liabilities that exceed assets, and income levels are not enough to pay down the debt. While some could make budget changes, such as moving to a cheaper apartment and cutting unnecessary expenses, others are too heavily into debt to pay their obligations.

The stress and aggravation of dealing with creditors may drive some to file for bankruptcy. While creditors must follow the law and avoid harassment, they may violate the rules. Creditors could also take legal action, further adding stress and expenses onto the debtor’s shoulders.

Even those hoping to stay current on their bills may find themselves paying minimum credit balances each month. Doing so might result in paying nothing but interest and seeing balances remain virtually the same.

Different bankruptcy chapters

Chapter 7 and Chapter 13 represent the two types of personal bankruptcy that people file. Chapter 7 involves liquidation bankruptcy, which consists of the discharge of unsecured debt after liquidating certain aspects.

People who don’t pass the means test for Chapter 7 could seek Chapter 13 bankruptcy. Chapter 13 filers receive some debt discharges, and debtors must pay the remaining debt through a payment plan.

Bankruptcy could put an end to a current debt situation and set a course for a new, better financial arrangement. The “fresh start” might rank as the top reason so many seek bankruptcy protection.