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What causes most Chapter 7 bankruptcies?

Chapter 7 bankruptcies typically result from medical and family crises

During the height of the Great Recession, more than 1.5 million people filed Chapter 7 bankruptcies, according to statistics from United States Courts. While that number has gone down as the economy recovers, the reasons why most people seek relief in a Chapter 7 case remain largely unchanged.

Insurmountable medical bills, overwhelming consumer debt and small business failures frequently are cited as the top financial losses that lead to bankruptcy. Medical debts account for nearly half of the personal bankruptcies in the United States, according to a Harvard University study published in the public policy journal Health Affairs.

Chapter 7, the most common legal action filed in the U.S. Bankruptcy Court, is also frequently sought by people who have experienced long periods of unemployment, marital problems, overextended consumer credit and large unexpected expenses.

Many debts that occur in these situations are considered unsecured, such as credit card bills, which have no tangible property attached to them. A family medical crisis often leads debtors to file Chapter 7 bankruptcy, in which all their non-exempt assets are sold to pay off bills before the U.S. Bankruptcy Court will discharge their debts. Once the case concludes, creditors are not allowed to pursue collection and any pending lawsuits to recoup losses are dismissed.

Consumer credit

When credit cards are at the heart of a bankruptcy case, there are usually financial losses that lead debtors to use consumer credit, which may be their only resource. Unemployment and divorces are often cited as reasons why people resort to high-interest loans and charge accounts to keep them afloat.

"Most people do not just run up their credit cards irresponsibly with the expectation that you can just wipe out the debts in a bankruptcy," writes Kristy Welsh, president and CEO of Web Nation, on Credit Info Center.

When bills of this magnitude loom, many people in debt don't have the finances to enter a Chapter 13 repayment plan that protects their property but also requires them to make monthly payments to creditors for several years.

Chapter 7, which generally allows debtors to protect their homes and cars through state and federal exemptions, becomes the most feasible alternative. Other possessions are sold to pay creditors. As a result, most attorneys will advise people to file a Chapter 7 petition when their debts are largely unsecured bills that will be discharged outright once the case is concluded.

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