Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, both houses of Congress solicited testimony regarding the rise in consumer bankruptcy filings. Consumer advocates, such as Harvard’s Elizabeth Warren, pointed to rising medical costs as a common reason for filing. However, creditor advocates maintained that the majority of consumer bankruptcy filers were simply mismanaging their money, and were more than capable of repaying their debts. Our experience at Leiden & Leiden – derived from over 37 years of representing consumers in the CSRA – indicates that while mismanagement is one factor that leads to financial problems, it is clearly in the minority.
Essentially, there are four common causes of financial problems that lead to a bankruptcy filing for the typical consumer. However, these causes are not exclusive, and it is not uncommon for multiple factors to be present in any one case. And while the ultimate cause of a bankruptcy filing may be the initiation of a lawsuit, garnishment or foreclosure, at some point there was an event that triggered the inability to maintain those debts.
In recent years, the most common cause of bankruptcy has been employment-related. Cities in the CSRA such as Waynesboro, Eatonton, Thomson and Evans have seen the departure of jobs as manufacturing plants closed down. Unfortunately, other industries have not been quick to fill in the void left by those employers. Unemployment benefits are usually insufficient to meet the routine demands of the household, not to mention monthly debt payments. Even if new employment is obtained, the debts have already gone into default, and the monthly payments are higher than they were before. Unfortunately, there is a lot of competition for the available employment opportunities in almost every industry and profession, and the odds of obtaining a position with a comparable salary are very great.
Even individuals who have not lost their jobs can still suffer due to cutbacks and hour reduction, as employers struggle to maintain their bottom lines. The elimination of overtime or differential pay can yield a shortage of several hundreds of dollars for a worker. Even workers who customarily receive the normal 40 hours per week have seen their hours reduced to 32 or 30 hours per week, resulting in a 20-25% reduction in income. Locally, many government institutions, such as the Boards of Education and other municipal offices, have had to resort to imposing unpaid furlough days to stay within budget. Some employers may reduce or eliminate benefits, which does not reduce the workers’ pay, but passes on costs for expenses like insurance.
The second most common cause of financial distress, leading to bankruptcy, is medically-related. Often a consumer will have a high amount of medical debt to an injury or medically-necessary procedure received at a time when they were uninsured or under-insured. However, this does mean that the debt to be eliminated is owed only to health care providers. Many times consumers will use credit cards and other financing alternatives to cover co-pays, deductibles, as well as prescriptions which may not be covered under their existing health care plans. This is especially common among senior citizens who receive fixed-income, but face escalating health care and prescription costs. Even the best insurance plans may still leave an overwhelming amount of debt to be handled by the consumer, especially if it involves a lengthy hospitalization or extensive period of rehabilitation.
The third most common cause of bankruptcy is due to domestic relations issues. Single mothers who do not receive child support – or receive it on an inconsistent basis – represent a high percentage of female bankruptcy filers. On the other hand, a divorced father who pays his child support on a timely basis may find that he is unable to maintain other bills. Many times both parties to a divorce struggle as they adapt to separate households (and expenses) without the benefit of the other spouses’ income. At Leiden & Leiden, we often encounter situations where the responsible spouse discovers too late that the other spouse has saddled them with debt above and beyond their ability to repay. Even when a divorce Judge orders that one spouse should be responsible for payment of a debt, that order is not binding on the creditor, who can seek payment from either spouse.
The fourth cause of bankruptcy is usually overextension or mismanagement. However, this represents the lowest percentage of filers out of the common causes. Sometimes it may be a young professional who obtained credit cards to help with paying for college, but then became unable to make the payments when their student loans came due. In other times, a young couple may optimistically (an unadvisedly) purchase more house than they can afford. Many couples do not anticipate the financial expense of having and raising children, and fail to adjust their budgets accordingly. Sometimes the failure to budget at all, or monitor expenses, is the culprit.
At Leiden & Leiden, we are fairly certain that a prospective client will identify with some of these causes. We have helped people in those situations, and would welcome the opportunity to meet with you to discuss your possible bankruptcy options.