Sometimes it can just take one unexpected event to lead people to bankruptcy. Just one visit to the emergency room or a marriage break-up can be enough to land someone in serious financial trouble. In fact, 46% of families in the U.S. say they would struggle to pay for an emergency cost of $400 and 56.3% have less than $1,000 in their savings. It’s no wonder then that people consider bankruptcy as an option to get themselves out of debt.
Before Choosing Bankruptcy
It’s important that you consider all the options before deciding that bankruptcy is your only option.
- Are you able to get your finances in order with a budget?
- Could your family help you out, without putting them under financial hardship?
- Do you have any assets to sell?
- Could you free up some money by restructuring the mortgage on your home?
If you think that you might be on the path to bankruptcy, or want some bankruptcy advice, then it’s important that you talk to someone with experience of Chapter 7 and Chapter 13 cases. Also, as each state has different laws on bankruptcy and what assets are exempt from creditors, you’ll need to make sure you know exactly what is relevant to where you are.
Common Causes Of Bankruptcy
Here are some of the most common causes of debt and bankruptcy in America and how you can avoid them, or at least, lessen the impact.
1. Medical Expenses
Around 40% of Americans owe money for periods they were sick and may even miss out on medical treatment due to the cost. Medical expenses represent around 62% of bankruptcies, according to a study by Harvard University.
Serious illness or injuries can easily result in huge medical bills, wiping out savings or home equity. Once these have been drained, then the only option might be bankruptcy.
To avoid medical debt and give yourself a safety net, make sure you have the best insurance plan you can afford. Even if you are relatively healthy, a medical plan covering major illnesses and injuries can be a financial lifesaver if you have an accident.
2. Job Loss
Losing your job can be devastating. Some people might be fortunate to receive severance packages, but many are forced to leave with nothing.
With no emergency fund, the situation will only get worse, and turning to credit cards or loans could end in disaster. Regularly adding to a savings account can really help to relieve the worry of any lost income.
People should aim to save around 3 to 6 months’ worth of household costs, in case they lose their job. This might seem like a lot, but even if you start small, as long as you remain consistent, you can watch your savings grow into an emergency fund that’s there if you need it.
Many people don’t realize they overspend until it’s too late. This is because they don’t really know where their money goes. And in some cases, people simply cannot control their spending. Credit card bills and various loan payments can easily spiral out of control, until the borrower is unable to make even just the minimum payment.
But by keeping track of your spending, noting all expenditures, however small, you can soon discover where your money is actually going and you can cut back. Good financial planning is key to avoiding bankruptcy and can help before it becomes inevitable.
Divorce can lead to tremendous financial strain on those involved. Legal fees, dividing assets, child support, alimony and the cost of maintaining two separate households after the relationship ends, all place a significant burden on financial resources.
It’s not surprising that many people find themselves filing for bankruptcy following a divorce. It’s often beneficial for both partners to file for a joint Chapter 7 bankruptcy, prior to divorcing, if most of the debt is in both names. Getting rid of this debt will leave more money available to support the two households.
5. Unexpected Expenses
We can’t always predict what’s going to happen in the future. But we do know that loss of property due to theft or natural events like floods or earthquakes, can force some into bankruptcy if not appropriately insured.
Many homeowners don’t realize that they should take out separate coverage for events like earthquakes. Without the correct coverage, people could risk losing their homes and possessions, with no funds to replace them.