How a Job Loss Can Lead to Bankruptcy

If a bankruptcy was something you could perform an autopsy on, you would discover that one of the most likely causes of "death" was job loss. Losing your job, even if it takes you only a few months to find a new one can be devastating to your finances.

Emergency Fund

Most experts recommend having an "emergency fund" of savings that is at least equal to three to six months of living expenses, because that is the average amount of time that it takes to become employed again. However, with more and more individuals and families feeling the effects of our current economy, just living paycheck to paycheck can be an enormous accomplishment that is only achieved by cutting the budget down to the bare minimum basics.

If you lose your job and don't have an emergency fund, or don't have one large enough to sustain you through a long job search you may be on a path that ends in bankruptcy.

How Basic is Basic?

When your income is drastically slashed by job loss, even those who were already down to the "bare" minimums in their spending have to cut deeper. Shelter, food and utilities get paid first and if there is anything left debts are paid, but often the individual or family no longer has the money to make even the minimum monthly payments on things like their credit cards or outstanding medical bills.

With foreclosure rates still climbing, it is obvious that many Americans are also having to choose less expensive shelter alternatives and are losing their homes in record numbers.

Escalating Late Fees and Interest

When you no longer have the money to make your minimum payments, a financial avalanche begins that you are powerless to stop. Late fees and interest skyrocket, sometimes doubling the amount the creditor says you owe in a matter of months which in turn causes higher and more unattainable monthly payments. Dunning notices are sent. Collection calls begin, regularly reminding you multiple times each day that you have unpaid debt and asking for payment.

You know that you would pay if you could. But no job means no income and that means no money. Finding a new job is hard enough, but the pressure and despair of seemingly insurmountable debt makes everything worse.

The Bankruptcy Option

Bankruptcy can give you a fresh start, yet it comes at a price which you may decide is painful but worth it. There are different types of bankruptcy that you can use to protect yourself from your creditors; they each have different benefits and risks.

Get Legal Advice

Talk to an attorney in your area who specializes in bankruptcy cases. They can answer your questions and help you decide if bankruptcy is right for you, and which type best suits your current situation. As an example, if you are still unemployed and don't have much in the way of assets you might choose Chapter 7, but if you recently got a new job and can manage a court supervised debt repayment plan Chapter 13 might be your best course of action. Talk to an attorney today.