Most People File Bankruptcy for the Same Reason

Having conducted at least 1000 bankruptcy consultations, there is one common thread that winds through most every story about how debtors ultimately wind up in financial distress.  Whether there is a job loss, illness, injury, divorce or other unforeseen event – ultimately, nearly all people arrive at the doorstep of bankruptcy because they don’t have adequate emergency savings.

As Kara McGuire reports, half of American households have less than $2,000 on hand for emergencies.  Although a common recommendation from “experts” is to set aside three to six months of living expenses for emergencies, that advice is neither feasible nor practical for many.  If you are fortunate enough to earn enough to both live and save for contingencies, you don’t want all of that cash sitting idly by earning minimal interest.  

The key to managing financial contingencies, according to Liz Pulliam Weston, Contributing Editor to MSN Money, is your overall financial flexibility - the resources you can command to help you withstand a crisis, even one that’s unexpectedly severe or long-lasting.  Interestingly, she suggests relying on credit for emergencies.  Homeowners with good jobs can usually access emergency cash from a low interest credit card or Home Equity Line of Credit (HELOC).

Reasonable credit opportunities, of course, are rarely available to America’s working poor, who are forced to rely on unscrupulous payday lenders, pawn shops and, if they’re lucky, high interest credit cards.  Undoubtedly, these families are living hand-to-mouth, hoping that nothing goes wrong, but with inadequate reserves, even fixing a car or replacing a dead air conditioner can be enough to kick-start an economic plunge.  As a result, bankruptcy has become the middle class contingency plan.