Top 5 Bankruptcy Reasons and How You Can Combat Them

Filing  for bankruptcy is often considered a worse case scenario for many people.  With that being said, bankruptcies in America have been on the rise. Bankruptcy can be a result of overspending or bad planning, however, sometimes there are circumstances out of your control. 

Filings hit an all time high in 2005.  There were more than 2 million cases initiated and the vast majority of bankruptcies were filed by consumers rather than businesses.

Congress had also implemented a legislation that makes it even harder for people to qualify for bankruptcy status – especially for repeat filers. Though the government has enacted policies to curb abuse of the bankruptcy system, these new policies have had little to no effect on who declares bankruptcy and when.  Ultimately, no one is proud of having to file bankruptcy.  But sometimes, it happens.  Here are the top reasons for bankruptcies and things you can do to prevent it from happening:

1. Medical Expenses
Not surprisingly, the number one reason for bankruptcy is medical expenses.  According to a study done at Harvard University, 62% of all personal bankruptcies is due to medical bills.  Ironically, 78% of the bankruptcy filers had some form of health insurance!  This goes to show that just because you have health insurance doesn’t mean that you can rely solely on that to cover your medical expenses.  Medical expenses (especially for serious or rare illnesses) can easily wipe out one’s savings or retirement accounts, college education funds and home equity.  Once these have been exhausted, bankruptcy may be the last resort.  Deter your medical expenses by choosing a better life style.  Choose healthier options.  Exercise regularly.  Get regular check ups.  Although there are things out of your control like genetic make-up or accidents, you can be pro-active with your health.  Obtain a good health insurance policy but, don’t rely solely on this.

2. Over-extending Your Credit
Simply put, a lot of people spend more than they make.  Whether it be credit card debt, installment debt on car and other loan payments, the insurmountable debt can easily spiral out of control.  Many people try the debt-consolidation route to keep their debts to one lender however, statistics have shown that most debt consolidation plans end up failing.  Others use the home equity loan which can be a temporary remedy for unsecured debt however, irresponsible borrowers can face foreclosure if they fail to make payments.  The best way to combat excess use of credit?  Buy only what you can pay up front.  Avoid interest rates, late fees and other overhead charges by paying only for what you can afford.  Live within your means.

3. Loss of Income
Whether it was termination, resignation or layoff…loss of income is devasting.  Although some folks are lucky enough to get a severance package, others aren’t s lucky.  To top it off, not having an emergency fund to draw from can worsen the situation.  Please see this article regarding emergency funds.  Many people will resort to using credit cards to pay bills, however, this will only increase debt.  As a result of job loss, health insurance coverage can be canceled and the cost of Cobra insurance can be quite costly for job seekers that are now very limited in resources. Be diligent when job seeking and save as much as you can while you have an income source.

4. Divorce or Separation
Tremendous financial strain on both partners are a result of divorce or separation.  Aside from the legal fees, division of marital assets, child support or alimony, maintaining two separate households…many people file bankruptcy after the ordeal.  The obvious remedy for divorce or separation?  Save as much as you can and find the right life-long partner.  I know…easier said, than done.

5. Unexpected Expenses
Loss of property due to unforeseen circumstances like: earthquakes, tornadoes, flooding, theft or even casualties can result in people filing bankruptcy.  Please keep in mind that if you are a homeowner, you may have to obtain a flood or earthquake policy that is separate from your home insurance.  Insurance can help assist in replacing possessions, immediate food and shelter as well as time loss from work.  Review your policy coverages to make sure you have the utmost protection for your investments.  If you have life insurance, make sure you are more than covered.  The recommended amount for term life insurance is between 10 to 12 times your annual income.  Life insurance can be a saving grace for unforeseen casualties.

We hope this article was helpful to you.  For additional information on how to manage your debt, please see Debt.org.