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Why is America leading the world in bankruptcy filings?  Is it our mind-set?  Is it our need to acquire everything we didn’t have when we were younger?
Each year, bankruptcy filings in the United States more than double the total number of filings during the entire Great Depression. A study done by the National Council of Economic Education found that one-third of Americans are illiterate when it comes to personal financial concepts and the status of the economy.
The average American has no savings, overspends on a monthly basis, and owns materialistic items that are not needed to survive.  While countries like China choose to save everything they make, America seems to flaunt everything they have made.  This mentality often leads to bankruptcy.
Here are the top 10 reasons why America is leading the world in bankruptcy filing.
1. Credit is too easy to acquire.
Credit card mail is becoming an epidemic; we all receive it. At times we’re subjected to 10 letters a month trying to sign us up for the latest “Platinum” credit card.  The typical consumer carries 9 credit cards granting them access to $19,000 in credit.  Since 1990, the average household credit card debt has increased 167%, due in part to the ease of use and availability of credit cards.
In 2004, Americans spent $412 billion with credit cards and acquired $43 billion in over-limit and late fees. The average credit card debt per open card was $4,617. In 2005 credit card late fees alone totaled $11 billion.
With all of the fees and debts associated with credit cards, it’s no wonder American’s are filing for bankruptcy.  Last year the loan brokering firm National Loan Exchange sold $50 billion in consumer debt — most of which came from credit card fallacies. Despite their friendly appeal, banks and loan brokering firms are out for one thing: your money.
2. Health insurance, illness and injury.
Accounting for nearly 50% of bankruptcy filings, medical expenses are one of the leading reasons for consumer lending in America.  Families that lack medical insurance and families with major medical problems tend to have higher credit card debt to help pay their medical bills.  The average credit card debt for families without medical insurance is 32.2% higher than families with medical insurance. For those with insurance, the medical world includes high deductibles, co-pays and exclusions (costs the insurance company does not cover), all of which aid to accumulating insurmountable debt.
Dr. David Himmelstein, an Associate Professor of Medicine at Harvard, commented: “Unless you’re Bill Gates you’re just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick.”
Other medical bankruptcy filings also include gambling additions, alcoholism, and deaths in a family.  The average cost of a funeral today is $6,500. If a family member experiences an untimely death, the rest of the family will be subjected to financial pitfalls, especially if that family member paid the majority of the bills.
Americans must realize the importance of having emergency fund money to protect themselves from financial troubles caused by medical expenses.  Understand your health insurance coverage and be prepared for the worst.
3. Interest rates and the housing market.
During the 1990s, Federal Reserve Board (FED) chairman Alan Greenspan knew that the stock market would not continue at its record growing pace forever.  The FED raised interest rates to counteract the excess growth of America.  It worked too well; in fact it sent America into a recession post “dot-com” boom.
To offset the recession, the FED approved a 1% overnight lending rate.  This made acquiring credit and mortgage loans in America a breeze.  In no time banks began acquiring loans from the FED and in return loaned money to their customers.
America saw a boom in the housing market, and a boom in mortgage lending.  Consumers were over spending in every other area, buying houses that they typically would not have the money for.  Americans did not understand that if interest rates rose they could no longer afford that house.
For the next 17 straight FED meetings, Alan Greenspan raised interest rates 25 base points until it eventually hit the current rate of 5.25%. The Housing Market bubble exploded.  Americans in the housing market over estimated what they could afford and hundred of thousands of houses were foreclosed on.  To stop a foreclosure a family can declare bankruptcy; that is exactly what American home owners turned to.
Greenspan was known for his genius FED policies, but his oscillating interest rates in the early 21st century hurt the American consumer.  Still, much of the blame lies on the American consumer with their mismanagement of capital and misunderstanding of the economy.
4. Loss of a job.
In 2006, 2 out of 3 people that filed bankruptcy had lost their job.  Most lost their job because of a personal or family illness and the resulting insurmountable medical payments.
According to the Federal Reserve, the typical family filing for bankruptcy owes more than one and a half times their annual income.  A family that makes $24,000 a year will have $36,000 dollars in debt.  The Labor Bureau of Statistics shows that American citizens sustain a negative savings rate. So when an American loses their job, more often then not they will not have any money saved up to fall back on.
Consumers need to prepare for the worst and save for the future.  Otherwise bankruptcy might be knocking on their door.
5. 2005 bankruptcy law change.
In April 2005, President Bush approved a bankruptcy reform bill that made it harder for individuals to clear debt by filing for bankruptcy.  The new law changed how individuals could file for bankruptcy from Chapter 7 to Chapter 13.
In Chapter 7 bankruptcy, your assets are liquidated and given to creditors thereby canceling all remaining debts, giving you a fresh start from 0.   Considering that most people who file for Chapter 7 do not have assets that can be liquidated, most creditors would receive little to nothing.
In Chapter 13 bankruptcy, you are put on a repayment plan that lasts up to 5 years.  Any debts that the repayment plan does not include do not have to be paid back.  The bankruptcy law change basically regulates the mentality of consumers, decreasing their likelihood of abusing bankruptcy laws.  Consumers can no longer receive a fresh start every time they get in trouble with credit, now they must pay back debts by filing Chapter 13.
A week before the law came into effect, 100,000 Americans nationwide filed for Chapter 7. The bankruptcy law change caused record high bankruptcy numbers in 2005. Bankruptcy filings jumped 31.6% from 2004 with a record 2.04 million filings in one year.  One in every 54 houses filed for bankruptcy in 2005.
6. Divorce.
According to a 2004 study, the number one cause of divorce is financial stress.  This financial stress is heightened even more after divorce.  The dissolution of a household will put stress on the two new households that are created.  One terrible bankruptcy can land any family member in bankruptcy.
Through divorce, two households now have to pay a mortgage or rent, utilities, attorney fees, day care (if needed), food, etc.  Bad credit is included with divorce, and even worse credit is usually on the way.  To keep up with all the payments people will confide in credit cards and before you know it interest rates on the cards start to increase and their credit gets worse and worse.  People then turn to Chapter 13 bankruptcy filing to get out of this hole.
Unfortunately for them, the 2005 Bankruptcy Abuse Prevention and Consumer Prevention Act makes it harder for people to file for bankruptcy while filing for divorce. This law prevents the involved parties from slipping out of alimony or child support, and makes it nearly impossible for people to start over with a clean slate.
7. Living from paycheck to paycheck.
Millions of Americans live from paycheck to paycheck: every paycheck they receive is used on goods needed at that moment.  This results in little savings and is a direct consequence in America’s negative savings rate.  If there is ever a break in their paycheck, be it from injury, illness, or pay decrease, that person (and his or her family) is in dire straits immediately.  Where does that person turn to? Credit cards or bankruptcy.
Over the last few years America has seen a dramatic increase in the cost of living. As utilities become more expensive to pay, families living from paycheck to paycheck have less money to use on consumer goods like groceries.  Eventually all the expenses catch up with the family forcing them into a tough financial situation.
Inflation factored in, wages have only increased 1% since 2001.  Gasoline prices have nearly doubled in the past 5 years.  In the 1st quarter of 2006, families spent 13.6% of their disposable income on paying off debts.  Looking at those economic numbers, there should be no surprise that a family living from paycheck to paycheck is in trouble.
8. Corporate restructuring.
50 years ago, a company would have rather declared bankruptcy before restructuring.  Today, corporate restructuring is almost an everyday occurrence across the globe.
Corporate restructuring happens because a company’s cost is close to or already exceeding revenue.  To compensate, a company will lay off employees to bring their labor productivity back up and their costs back down. As a result, the company can maintain the same revenue they had before.
Be prepared for the worst; to most companies, employees are indispensable — a dime a dozen. Make sure to have an emergency income fund to protect yourself.
9. Overspending.
A country with a $12 trillion GDP thinks of one thing only, “I want that.” Americans grossly overspend in every aspect of life.  An average American overeats, overbuys, and purchases items that bring no utility to a normal and healthy life. Countries all over the world think of America as a country that buys, buys, and buys.
Perhaps the biggest consequence to the overspending American comes during Christmas time, where Americans are purchasing the most. If a family gets hit by unemployment or a death during the Christmas holidays, financial debt is sure to come.
Instead of splurging, put away all that extra cash and make some sacrifices for a better future.
10. Student loans and debt.
Americans under the age of 25 are the fastest growing group of bankruptcy filers; 19% of Americans between the ages of 18-24 declared bankruptcy last year.  Why do American consumers just starting their adult lives almost make up one-fifth of bankruptcy filing in America?
Most Americans at the age of 18 start life on their own. They no longer live under the care of their parents and must find out what life has in store for them.  If the 18 year old pays for college, they must take out student loans and often acquire credit cards to pay for living expenses. Depending on which university they attend, when a student gets out of school they can be over $50,000 in debt.  What is an easier way to clear that debt than filing Chapter 7 bankruptcy?
Credit cards companies feed off of the 18-25 year old bracket, especially those in college. Students are subjected to surprisingly high interest rates which will often increase as students have great difficulty making every monthly payment.  Over time, debt will start to accumulate making matters worse.  Once the student graduates from college, the loan sharks come knocking on the door and expect the now broke college graduate to pay back all of his or her student loans.  Despite their success in graduating from college, the graduate is now subjected to a tough lifestyle of debt, and will often turn to bankruptcy.

Forbes predicts that in 2007 another bankruptcy boom is coming like that of 2005.  They blame it on an environment where anyone can borrow cash when it is needed through lending services, people being unknowledgeable in money management, and gross overspending.
None of the economic factors over the last 20 years that have caused people to file bankruptcy have evaporated, yet people ignore them as if “it won’t happen to me.” By falling into this mindset, consumers find there is no option but bankruptcy.  Don’t let this happen to you, be prepared.
For the statistics used in this article check out: Credit Card Industry Facts and Personal Debt Statistics.

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