Bankruptcy often serves as a final option for Brits overwhelmed by significant and unmanageable debt. While it can provide a fresh start, it also carries serious consequences. Here are the most common reasons that lead people to declare bankruptcy.
Excessive Use of Credit
Excessively relying on credit cards for everyday expenses can lead Brits to struggle with high levels of unmanageable debt. High interest rates and minimum payments can cause debt to become a cycle of borrowing and repayment that’s difficult to escape. In fact, Step Change reports that owing as low as £5,000 can give a provider the right to force you into bankruptcy.
Lack of Insurance
Insurance is a vital financial safety net for unexpected events. Not having adequate home, auto, or life insurance can result in significant economic losses when these unexpected events occur. For example, the cost of replacing or repairing property out-of-pocket can be prohibitive and lead Brits to spiral into debt and eventually bankruptcy.
Job Loss
Sudden unemployment, from layoffs, structural changes, and firings, disrupts financial stability, especially for those living paycheck-to-paycheck. Severance pay is often insufficient to cover long-term unemployment periods, and many Brits find themselves struggling to pay for food, rent or mortgage payments, and utility bills, so they declare bankruptcy.
Poor Financial Planning
A lack of budgeting and inadequate savings can make individuals, especially those with lower incomes, unprepared for unexpected expenses. Failing to plan for future expenses like education and retirement can also lead to debt and potential bankruptcy.
Unexpected Expenses
Emergencies, like car breakdowns and home fires, can quickly deplete savings. Those without emergency funds may resort to high-interest loans, like payday loans or credit cards, to pay for these unexpected events. Insurance often only covers some expenses, leading to significant out-of-pocket costs.
Addiction
Addiction to gambling, drugs, and alcohol often leads to compulsive spending and significant financial problems. Addiction can also lead Brits to lose their jobs, which further exacerbates financial difficulties, and spending on addiction recovery will also strain finances.
Failure to Pay Taxes
Owing back taxes and current taxes to HMRC can lead to significant interest, penalties, and even legal action. Unfortunately, it’s all too common for individuals and businesses to find themselves unable to pay off their tax debt and the interest accrued, leading to bankruptcy.
Bad Property Investments
Investing in property is potentially an effective method of diversifying a portfolio and earning extra money. However, investing without doing proper research or at the wrong time in the market can lead to significant financial losses, with mortgage payments on properties that have lost value.
Utility Bills
Utility bills are often high during the winter and can become unmanageable for poorly insulated homes or fixed-income households. Utility shut-offs can also lead to further expenses, including motel stays and reestablishing service costs.
Overspending
Many Brits spend more as they earn more, but many find themselves living beyond their means. Luxury purchases, expensive vacations, and a generally high-cost lifestyle see some people accumulate debt faster than they can repay it.
Divorce
Legal fees, alimony, child support, and the division of assets during a divorce can financially strain both parties and cause them to file for bankruptcy to cope. Justia notes that some couples file for bankruptcy before their divorce to get a joint petition. In other cases, one spouse struggles with their financial files separately, and others wait “until after the divorce because the reduction in their income may make it easier to pass the means test.”
Credit Scams and Fraud
It’s a sad reality that every day, Brits fall victim to identity theft, credit fraud, and other scams. These people often find themselves responsible for debts they did not incur, and the legal and financial process of resolving fraud can be costly and time-consuming. However, before filing for bankruptcy, they should always speak to their bank first, who may be able to help.
Decline in Property Value
If property values in their area fall, homeowners may find themselves owing more in mortgage payments than their property is worth. Declining property values can also negatively impact Brits’ ability to refinance or secure home equity loans for debt consolidation.
Business Failure
The Bureau of Labor Statistics reveals that 20% of small businesses “fail within their first year,” with the failure rate increasing to 30% by the second year, 50% after five years, and 70% after a decade. The repayments of loans taken on establishing small businesses and the expenses of running the business can lead small business owners to declare bankruptcy.