When it comes to getting into financial trouble and going bankrupt, many people think the reason is poor finances. While this does play a role, there are other reasons why people go bankrupt. In fact, in some cases, the cause of bankruptcy is out of the control of the person involved.
Someone who is doing the right things financially and saving money can still find themselves staring in the face of filing for bankruptcy. So what are the major reasons why people go bankrupt? And what can you do to protect yourself?
In this post, I’ll answer these questions. Let’s get started!
5 Major Reasons Why People Go Bankrupt
#1. Medical Debt
Overall, the leading cause for people to go bankrupt is medical debt. In fact, Harvard University found that 62% of all bankruptcies were due to medical debt. When you take a minute to think about this, it shouldn’t surprise you.
The cost of healthcare is ever rising and as advances in technology bring about better healthcare, more and more people are becoming patients. Add to the fact that health insurance is also expensive and confusing, it is no wonder why people face astronomical medical bills.
I’m certain most readers found themselves at one point in shock when they opened up a bill from a hospital or doctor and saw just how much they owed.
#2. Job Loss
Another major reason why people go bankrupt is job loss. This is especially true when the economy hits a downturn and companies begin to lay off workers. But it can also happen anytime.
The main reason behind bankruptcy here is two-fold. One could be the poor management of personal income. Having an emergency fund is critical to cover yourself in the event of a job loss.
But even with an emergency fund, it may not help you completely avoid filing for bankruptcy. This is because it can take much longer to find a job.
For example, some older Americans are still looking for full time work many years after the housing bubble burst. I’m sure that even if they had the recommended 8 months worth of expenses saved in an emergency fund, they would be feeling the pinch.
Divorce is another major cause of bankruptcy. When you have to split the assets it can expose many years of living on the edge financially. Add in the fact that one partner most likely cannot afford the mortgage by themselves, and you have a case for bankruptcy.
Of course, we cannot overlook the cost of legal fees for filing for divorce either. If it is a heated divorce that is dragged out over time, the legal costs will be high.
Finally, you have any alimony or child support that needs to be paid as well. When you add up all of these expenses, it is easy to see why so many new divorcees file for bankruptcy.
Of course, there might not be a major reason like divorce, job loss, or large medical bills forcing you to file for bankruptcy. It could simply be poor financial habits.
If you don’t budget your money and set aside some money each month in savings, it’s not a matter of if you will face financial hardship, it is a matter of when. And the hardship could last for a very long time too, depending on how dire things get.
What makes this worse is that avoiding overspending is completely in your control. Anyone can easily set up a budget and start being smart with their money. It’s just that too few people do.
Don’t make the mistake of ignoring your finances. The stress and headaches that come from hardships with your money is not worth it.
#5. Unexpected Expenses
Finally we have unexpected expenses as a cause for bankruptcy. In some cases, poor insurance coverage can be a factor in the loss. For example, if a fire destroys your home and you don’t have adequate insurance coverage, then you may have to file for bankruptcy.
But sometimes things are out of your control. For instance, maybe the weather pattern changes and you get hammered with heavy rain for a period of time that causes major flooding.
Even with a solid financial picture, this event can destroy your finances. Unexpected events are out of your control and even with proper planning, cannot be avoided. And they can easily wreak havoc on you financially.
There are 5 major reasons why people go bankrupt. As you can see, some are within your control and others are not. At the end of the day, your best defense is proper planning of your finances and saving money in an emergency fund.
While this might not help you completely avoid financial hardship and bankruptcy, it can limit the possibility. And lowering the chances of it happening are worth the effort.