Bankruptcy comes with social stigma, and many people feel guilt and shame for having to resort to it, but it’s not usually the result of bad decision-making. It tends to happen because of unexpected financial hardship. And if you don’t have a high-income and already carry some debt, those credit card balances and loan payments can quickly become overwhelming and leave you with no other choice but filing for bankruptcy to get some relief.
Knowing about the main causes of bankruptcy can help you equip yourself a little bit better in the event of a rainy day. Always aim to have an emergency fund. Do your research when it comes to healthcare coverage and choose employers accordingly if you are able to. Use a loan repayment calculator to estimate the minimum monthly payments you’ll need to be able to keep up with no matter what happens. Knowing the state of your finances intimately is the antidote to worrying about them.
Here are the top five reasons why people go bankrupt so you can protect yourself financially to the best of your ability.
Even with health insurance, medical bills incurred by serious disease or injuries can quickly destroy your finances: 66.5% of bankruptcies in the U.S. are due to medical issues like being unable to pay high bills or time lost from work, according to a 2019 study published in the American Journal of Public Health.
Having an emergency fund is important. But it’s not realistic if you are living paycheck to paycheck. And when unexpected job loss happens and you aren’t lucky enough to be given a severance package or access unemployment insurance, it can be downright devastating. Using your credit card to cover living expenses can quickly turn into drowning in debt, and later filing for bankruptcy.
Sometimes you’re just at the wrong place at the wrong time. Natural disasters such as hurricanes or earthquakes are often not covered by insurance providers, leaving people affected by them scrambling to rebuild their life after losing all their possessions. Other types of unexpected misfortune that leads to bankruptcy include critical yet expensive home repairs, or theft.
Legal battles can quickly drain your bank account. Divorce usually comes with huge attorney fees for both partners involved. Not to mention the division of assets, child support and alimony payments. If you’re not prepared or things become less-than-amicable or downright hostile, it can spiral into going bankrupt. But there are other reasons for litigation. And having to defend yourself in court, whatever the cause, can be devastating for your finances.
Living above your means
Relying on credit can snowball into bankruptcy. Let’s say you have one credit card at first. You use it to go on a trip even though you can’t pay for it in cash, because someone you care about is getting married abroad. Maybe you sometimes go out with it when you’ve used all of your paycheck money. Next thing you know, the bank offers you a credit limit increase or another card. You take it, because why not? And you get more and more comfortable carrying a larger balance. Until interest adds up and you can’t make your payments anymore.