What's Tipping Americans into Bankruptcy?

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It's no secret that times are tough. Food and housing costs are skyrocketing as we settle into an economic recession; Americans are clearly struggling. In a recent report released by the Administrative Office of the U.S. Courts, there were more than 950,000 bankruptcy cases filed between July 1, 2007 and June 30, 2008. That's a 28.9% increase from the same timeframe the previous year.

And it's not just individuals facing this dilemma. Of the total bankruptcy filings, there were 33,822 business filings—up 41.6% from the previous year.

What's going on? Where is all the money going? Take a look to see what's tipping Americans into bankruptcy—and find out how you can make sure you're not in danger.

Housing Costs

The meltdown of the mortgage industry was tough on the economy, and homeowners have had it the toughest. Families who can't afford their monthly mortgage payments risk losing their homes in foreclosure. Declining home values are making the problem worse since homeowners can't count on loans against the value of their homes to pay down other debt (such as credit card debt), especially if the value of the outstanding loan exceeds the home's market value.

Tip: Be wary of variable home loans. If you're already tied to one, consider re-financing to a fixed-rate mortgage, or discuss other options with your lender.

Credit Card Debt

We live in a "gotta have it now" culture, and credit cards have allowed Americans to purchase anything at anytime—regardless of whether or not they can afford it. A steady stream of mailed credit card offers further exacerbates the issue and compels many people to open new accounts and take on more debt than they can afford.

Tip: Whenever possible, pay off the balance on each card monthly. If you're carrying a balance, always pay more than the minimum required amount. Otherwise, it could take years to pay off the balance. And if your credit card accounts have high interest rates, call your credit card company to ask about lowering your rate or consider transferring the balance to an account with a lower rate.

Student Loans

The cost of education is increasing yearly, and students are taking on unprecedented loan amounts to pay for undergraduate and advanced degrees. According to the 2003-2004 National Postsecondary Student Aid Study (NPSAS), two-thirds of undergraduate students leave college with some debt, and the average student loan debt among graduating seniors is around $19,000. Most student loan plans include an in-school deferment option, but some Americans are finding it hard to make student loan payments once out of school.

Tip: Consider consolidating your loans. This will reduce the number of creditors to which you owe money, as well as lock in a steady interest rate. If you think you'll be unable to make payments on your loan, look into an economic hardship deferment or forbearance option, or into extending the life of your loan. Interest will continue to accrue, however, so be sure to make payments more than or equal to the monthly interest amount so you don't go deeper into debt.

Medical Debt

Health insurance is a luxury not all Americans are able to afford. With increasing health premiums and decreasing coverage, a prolonged illness or serious accident can drain not only an individual's savings, but shake the foundations of the entire family. According to Families USA, "about half of all personal bankruptcy cases are due, at least in part, to medical costs. And, among those whose illness led to bankruptcy, more than three in four had insurance at the onset of the illness."

Tip: If you can, get health insurance to help lessen the blow of expensive medical care. If you don't have health insurance, set up a personal health savings account for yourself; if you ever need it, you'll have a pool of money to use for medical expenses. Get regular checkups. The sooner you catch potential problems, the easier and less expensive they are to treat.

Tough economic times call for increased control of expenses and debt. When it comes to money, it's hard not to feel overwhelmed with all the daunting scenarios. But most financial pitfalls are avoidable. You can avoid tipping into bankruptcy if you watch what you spend, buy only what you can afford, and get proactive in tracking your finances.

Sources:

US Courts Bankruptcy Filings data

"Choosing Bankruptcy to Stay Afloat" by Nancy Trejos. Washington Post, May 28, 2008.

FinAid.org

Stand Up for Healthcare/Families USA

"Student Loan Debt -- How to Get Relief" by Jen Haley. CNN, March 5, 2008.