Losing a job does not necessarily mean that someone will get to the point of declaring bankruptcy. Nonetheless, job loss is one of the leading causes of bankruptcy.
Here is how job loss can lead to filing for bankruptcy:
Significant financial strain
Typically, when someone loses their source of income, they use their final paycheck and severance pay if offered. After exhausting this, they often tap into savings while looking for another job. They may also start living on a strict budget, eliminating non-essential spending.
It’s also not uncommon for people to apply for unemployment insurance (UI). This gives them weekly cash to pay bills while searching for a job.
If someone is not eligible for UI or they exhaust their maximum allotted weeks and still have not secured a job, they may turn to local and state emergency resources. For instance, Massachusetts offers Residential Assistance for Families in Transition (RAFT) to protect homeowners from eviction, foreclosure or utility shutoffs.
These resources are usually short-term. So, if someone does not secure a job, they may start using credit cards. However, some turn to credit cards even earlier. For example, if someone exhausts their emergency savings within weeks or during the delays of waiting for UI, severance processing or government assistance.
Within months of relying on debt to pay living expenses and medical bills, a situation may shift from a temporary solution to accruing significant debt. This can also include borrowing money from loved ones, missed payments and compounding penalties. In which case, filing for bankruptcy may be the next option.
Long-term unemployment can lead to trouble paying rent/mortage, car payments and utilities. If this is your experience and you are considering bankruptcy, get more information to determine if you qualify and the most suitable type for you.