In recent discussions on financial strategies and socioeconomic behavior, a surprising trend has emerged: affluent individuals filing for bankruptcy more frequently than those in dire financial need. This phenomenon has sparked widespread debate, challenging conventional notions of who actually utilizes bankruptcy as a financial lifeline.
Traditionally viewed as a last resort for those facing insurmountable debt, bankruptcy is increasingly being used as a strategic tool by the wealthy to reset their finances. This step allows companies to rise from the ashes of bad financial decisions and it's clear who wins in this system - the companies and their leaders.
Why do we see more company owners filing for bankruptcy compared to low-income individuals? There's a key difference: for the rich, bankruptcy can be a strategic tool. A Bayarea report highlights this - accumulating large debts is easier when you're wealthy, and legal options like bankruptcy protection are still available.
There are two key factors that point to why there are more company owners filing for bankruptcy compared to low-income individuals:
Debt Size: Wealthy individuals often manage larger businesses, which can accumulate significant debt. While their personal assets might be substantial, the company's debts may still overwhelm them.
Strategic Use of Bankruptcy: Unlike someone struggling with everyday expenses, wealthy individuals may use bankruptcy strategically. Chapter 11 allows companies to restructure debt and potentially shield themselves from lawsuits.
Social media influencer LifeAsKiki, highlighted how bankruptcy can help not only the rich but also those in the lower income bracket and has sparked discussion by suggesting bankruptcy as an option for those struggling financially.
Using Bankruptcy To One's Advantage
In a viral TikTok video, LifeAsKiki, a popular social media figure, discussed the intricacies of bankruptcy, shedding light on its necessity, consequences, and potential benefits. She opens her video by acknowledging a troubling trend: a growing number of individuals are grappling with car repossessions, plummeting credit scores, and insurmountable debt.
For many, LifeAsKiki suggests, bankruptcy could offer a crucial lifeline, a source of relief and potential benefits, especially for those constantly dodging relentless creditor calls.
LifeAsKiki doesn't hold back in her critique of "credit defenders"—individuals who shame those struggling with debt. She passionately urges her viewers to stop defending companies that would abandon them in tough times and prioritise their financial well-being instead.
Addressing a common misconception, LifeAsKiki clarified that filing for bankruptcy does not spell the end of homeownership dreams. She explained that purchasing a home is not only possible within two years after filing for Chapter 7 bankruptcy, but also a realistic goal, though specific requirements may apply.
LifeAsKiki emphasises that bankruptcy may not be helpful if a car has already been repossessed. However, she highlights an important point: wealthy individuals utilise bankruptcy as a strategic tool more frequently than those who might genuinely need it.
LifeAsKiki concludes by encouraging her viewers to consider her financial advice and consult with an attorney to explore the possibility of bankruptcy. Per the influencer, this 'solution' can also strike successful ventures.
On the other hand, entrepreneurs who build successful businesses from the ground up can sometimes face unforeseen circumstances that lead to bankruptcy. For example, the founders of a popular ice cream company, Ample Hills Creamery, filed for bankruptcy just six months after achieving significant success.
The Road to Bankruptcy: Top 5 Causes
Bankruptcy rarely stems from a single cause. While irresponsible spending can play a role, other unforeseen circumstances can also push individuals to seek this legal option. Let's explore the five most common reasons people file for bankruptcy:
1) Losing Income
Experiencing a job loss can be a major financial setback, particularly for those already living paycheck to paycheck. As a recent September 2023 survey revealed, 78% of Americans have little to no financial buffer after covering monthly expenses.
2) Crushing Medical Bills
Medical expenses are a leading cause of bankruptcy. These costs can not only drain savings but also lead to job loss if a condition requires extensive treatment or limits your ability to work. Furthermore, job loss often coincides with a loss of health insurance, leaving individuals even more vulnerable to financial hardship in the face of medical emergencies.
While government programs like COBRA exist to help laid-off workers maintain health insurance, the burden often remains substantial. COBRA requires individuals to cover the entire premium cost previously shared by the employer and an administrative fee. This significant financial strain can render COBRA an unrealistic option for many, especially during unemployment.
3) Unaffordable Mortgages And Foreclosure Risk
Homeownership often involves significant debt through mortgages, making it the largest category of household debt in the United States. According to the Federal Reserve Bank of New York, at the end of Q4 2023, housing-related debt, including mortgages and home equity lines of credit, surpassed $12.61 trillion, accounting for roughly 72% of all household debt in the U.S.
This heavy reliance on mortgage debt can lead to financial hardship if borrowers face economic challenges and struggle to make their monthly payments, potentially resulting in foreclosure.
Sometimes, lenders may approve mortgages exceeding a borrower's comfortable repayment range. This situation creates vulnerability to foreclosure if financial hardships arise, such as job loss or unexpected expenses.
4) Overspending
Creating a budget is crucial to minimise the risk of overspending and potential bankruptcy. This plan should ensure your income consistently surpasses your expenses. Additionally, building an emergency fund can provide a vital safety net. Aiming for several months' worth of living costs can help you weather unexpected financial blows without resorting to debt.
While building a safety net is crucial, self-made millionaires like Barbara Corcoran and Grant Cardone advocate for a different approach to wealth-building. They believe that simply saving money might not be enough. Instead, they emphasise strategic spending, where you invest your money in ways that can generate returns.
5) The Burden of Family Support
Providing financial assistance to loved ones can sometimes contribute to bankruptcy. Whether it's supporting adult children or assisting ageing parents, many individuals struggle to say no to family members facing financial hardship.
Additional Triggers for Bankruptcy
Beyond the common reasons mentioned, several other circumstances can lead to bankruptcy. Student loan debt, for instance, can be a significant burden. While discharging it through bankruptcy is challenging, it's not out of the question.
A 2022 policy introduced an "adversary proceeding" option for federal student loans, allowing borrowers to demonstrate undue hardship and potentially seek discharge.
In some cases, individuals may file for bankruptcy to strategically eliminate other debts and free up resources for managing student loan payments. Financial strain can also arise from divorce or separation due to legal fees and other associated costs.
While bankruptcy can be a tool used by both the wealthy and those facing hardship, the motivations and outcomes often differ. For average income earners struggling with debt, simply knowing about bankruptcy can be empowering. This knowledge allows you to evaluate your options, and make informed decisions.
