Bankruptcy is seen by some as a moral failing. But bankruptcy in the 21st century is far from a purely individual experience with an individual responsibility. It is much more connected to societal forces outside of a person’s control than you may realize.
Medical Bills: The Leading Cause of Bankruptcy
Medical bills are a key cause of bankruptcy today — one look at any invoice makes it hardly a mystery. Prices for medical care are so high due to the way medical procedures are billed to insurance companies. Insurance pays doctors based on the procedures and tests performed, and these procedures are often incredibly expensive. The result is that doctors and hospitals have an incentive to pile these costs on, instead of curbing them for competitive advantage.
While most people have insurance, that does not mean they are not out of the clear. Some procedures are not covered by insurance, and some people let their insurance lapse. In those cases, people can be facing millions of dollars in debts because they simply got sick and went to a hospital. They are forced to turn to solutions such as chapter 13 bankruptcy, which restructures their debt and brings monthly payments down to a manageable level. If not, they will have to default and undergo the indignity and property loss that comes along with it.
Low Wages: Another Cause of Bankruptcy
Another major societal reason for bankruptcy is low wages and a fickle job market. Wages have been kept low for the past several decades as low taxes and weak union protections have removed any incentive for businesses to raise these wages. Employees can be fired or laid off in most states for any reason and at any time. This significant drop in income from a lost job can occur due to no fault at all of the employee.
Partial or total lost income means that a person cannot pay their bills and will inevitably be forced into bankruptcy. For example, an individual who has a $1000 per month mortgage would be able to afford it if they had a job that paid $2000 per month. But if that job ended and they only made $1500 per month, the mortgage would be unattainable.
The current American tax system, along with food inflation, means that taxes and food items eat into most of the individual’s budget. If they missed enough payments, late fees and penalties could double that $1000 per month mortgage, creating a hole that is very difficult to climb out of.
Student Loans and Bankruptcy
High-cost student loans are a unique, more recent cause of bankruptcy. In recent decades, the costs of going to college have skyrocketed by many times their lows in the decades after the Second World War. At the same time, the number of jobs that a person can obtain without a college education has sharply decreased. Students are forced to go deeper and deeper into debt in order to fund the college education necessary to pay off said debt. Do you see the irony here?
While bankruptcy cannot erase student loan debt, many people suffering student loan debt have turned to it as a way to pay off all of their other debts. The strategy is to declare bankruptcy on non-student debts and take the freed-up cash to use to pay off student loans. A person can be on the road to bankruptcy simply for attending the college courses they need to make a living.
Bankruptcy is not always the result of our poor choices. Instead, it is the result of societal factors placing more strain on people than they can be reasonably be expected to manage. Rather than shaming those who are forced to turn to bankruptcy for help, perhaps we should start taking a closer look at the structure that put them there.