Why People Apply for Bankruptcies

In the United States, people consider their financial life very important. This can be reflected in their credit record or report. Whenever there are late payments, collection accounts, delinquencies and even bankruptcies, all these go to their credit reports, lowering their credit scores. A low credit score means limited borrowing power. Difficulties in getting approved for loans can be experienced if your credit score did not meet the lender's standards.

Sometimes, the reason for negative the negative entries in your credit report can be attributed to mismanagement of your finances and can easily be remedied by discipline and adjustment of spending habits. On the other hand, there are people who file for bankruptcies because after trying to explore all available options, they still did not manage to pay off their debts. To seek protection form their creditors, these people would file for bankruptcies in bankruptcy court.

Depending on their circumstances, they could either file under Chapter 7 or Chapter 13. A Chapter 7 Bankruptcy will rid a person of all his debts but lose all his assets in the process. Of course, the burden of proof lies with the person filing for such bankruptcy. On the other hand, a Chapter 13 Bankruptcy allows a person to re-pay all his debts according to an arrangement that is decided by the bankruptcy court. Usually, the bankruptcy court considers the person's payment capability before deciding on a repayment plan. Creditors are usually left with no choice but to agree to this re-payment scheme.

In most cases, the reason that put people in this situation involved the following circumstances.

Unemployment
The loss of a permanent job can wreak havoc to a person's finances. This is the reason why many financial experts recommend saving at least three months worth of salary in order to prepare for situations like this. People who lost their jobs will find themselves maxing out their credit cards, taking out personal loans or borrowing from their friends to make ends meet. When their financial situation does not improve, they are left with a mountain of debts that they could never afford to pay now.

Medical Emergency/Death in the Family
Whenever there is a medical emergency or death in the family, some people would tap into their budget because they did not manage to set aside money for crisis like these. Again, it would be wise to set aside a portion of your income every month so that you will have an emergency source of fund.

Foreclosures
The rising foreclosures rate in the country shows that more and more people are having trouble paying their mortgages. It could be due to rising cost of living and high interest rates. On the other hand, there are those who were badly-advised and took out loans they could never afford. After some time, this would take a toll on their finances. Eventually, they lose their home to foreclosure and are left with a huge amount of debt that they have no way of paying.