The Real Causes Of Bankruptcy Aren't What You Think

The columnist who equated debt problems with irresponsibility nearly caused me to melt down, right in my law office.

Irresponsibility, he said!

The idea that people who find themselves with bills they can’t pay got in that mess through flighty behavior or self absorption is sooooo wrong.

The real causes of bankruptcy

Mindless spending is seldom the cause of bankruptcy in my 44 years of experience. Occasionally, yes; routinely, no.

The need for bankruptcy is more often tied to

Job loss
Ill health
Business failure
Supporting multiple generations of family
Divorce

To that list we can add pandemic.

Credit card balances are usually tied to basic living expenses, recent studies show, not to extravagant living.

The gig economy hasn’t helped. Without employee benefits and regular work hours, workers find themselves responsible for providing insurance, tax withholding and without sick days or retirement plans. And gig earnings seldom cut it for very long in the Bay Area.

The real causes of bankruptcy

In fact, I see people in my bankruptcy office because they followed the time-honored advice we give to each other.

They bought a house.
They started a business.
They cared for their extended family.

They robbed Peter to pay Paul rather than renege on their debts.

And, at some point, it all caught up with them.

Often, the problem looks like a tax problem and it’s IRS collection action that brings them to bankruptcy.

But the more likely cause is the fact they reduced their tax withholding to create cash to meet other obligations. Or they paid their employees with “net checks” and didn’t pay over the employee’s tax withholding in order to nurse the business along a bit more.

Or, they are supporting both adult, underemployed children and aged parents.

Then there’s the curse of home ownership. During the Great Recession, created by manic buying of homes made possible by toxic loans, I often advocated for letting the house go as being an impossible financial burden.

But 10 years later, with home prices recovered and then some, I’m starting to see the up side of struggling to keep a home.

Rents are increasing as fast as home prices: let the house go and you’ll pay nearly as much in rent, get none of the tax advantages of home ownership, and have no protection against continuing increases in rent.

Renters are even more vulnerable than those with overly costly homes.