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On average over 500,000 Americans file for personal bankruptcy every year. That’s only about 1% of the number of Americans who could file if they chose to. That’s a sobering statistic, and it highlights the need to talk more about bankruptcy in this country.
Specifically, we need to talk about the common causes of bankruptcy and how they can be avoided when you’re just starting your financial life. Taking preventative measures before anything goes wrong can set you up for lasting financial success.
Common Causes Of Bankruptcy
There are many causes of bankruptcy and the issues are complex and detailed. That being said, the top five causes in America are medical bills, divorce, poor financial management, job loss, and unexpected emergencies. Those are broad topics but here’s a little more detailed information you should know about each of them.
Medical Bills
Over 50% of bankruptcies filed in the U.S. are the cause of extensive medical bills. So it isn’t surprising that there’s a crossover between states with the lowest quality of healthcare and states with high bankruptcy statistics. For example, Mississippi has ranked 50th in health several times and is also one of the top five states where people declare bankruptcy.
When preventative health care isn’t an option, you end up with more costly issues. One unexpected hospital stay is all it takes to wipe out your savings and put you in debt. Once you’re in that spot, bankruptcy may be your only option.
Divorce
Lawyers report that over 50% of the bankruptcy clients they see are within 5 years of a divorce. The financial strain caused by lawyer fees, court costs, and the splitting of resources can be devastating. In addition to those fees, there are often on-going spousal or child support payments. When the costs can’t be paid, bankruptcy can follow.
Poor Financial Management
Poor financial management covers a variety of problems. The core issue is that people aren’t taught how to properly manage their finances when they begin working. You get a job and then you decide to get a credit card or a loan, and suddenly you’re in over your head.
Debt can happen before you know it, it only takes one missed payment. Once the debt is there, the late fees and interest make it nearly impossible to undo the damage. When you can’t undo the damage, you find yourself facing bankruptcy to make the debt go away.
Job Loss
You lose your job and the bills are due. You’re faced with not being able to pay them, or putting them on credit. It’s an unfortunately common problem. Job loss can come out of nowhere and leave you in a tough financial spot if you aren’t prepared for it.
When you’re new to the work world, it’s easy to forget that all jobs have the potential to be temporary. If the past few years have shown us anything it’s that entire industries can be changed in just a few days.
Unexpected Emergencies
Your car breaks down. You get evicted from your apartment. What do you do now? These kinds of emergencies are never expected and you probably weren’t taught how to prepare for them. Even if you do know how to prepare, you might not be able to.
As of 2019, 78% of working Americans lived paycheck to paycheck. That means that they have little or no savings because they simply don’t have enough money. So, it’s not shocking that unexpected emergencies can often lead to bankruptcy.
How To Protect Yourself From The Common Causes Of Bankruptcy
Now that you know what the common causes of bankruptcy are, you’re no doubt wondering how you can prevent them. How do you start your financial life on the right foot and keep yourself on track? There are steps you can take to protect yourself from each of the common causes.
Prepare For Medical Bills
You don’t plan to have an accident when you have a car, but you have insurance just in case. That logic can, and should, also apply to your body. You’re a human, and at some point, humans have to go to the doctor.
15% of young adults aged 18 to 34 don’t have health insurance. If you’re one of them, and you get sick or have an accident, it could ruin your financial life. It’s easy to say that it won’t happen to you, but it’s impossible to know.
Protect yourself from bankruptcy caused by medical bills by having health insurance, creating an emergency fund, and having regular checkups. Health insurance prevents you from paying the whole cost yourself. An emergency fund covers what you do have to pay. Regular checkups can help prevent more costly health issues.
Taking these steps now can save you from financial trouble later.
Discuss A Divorce
It’s not the most romantic of topics to discuss before you get married, but having an honest conversation before saying your vows can save you a lot of financial hardship. Discuss the possibility of each of you signing a pre-nuptial agreement.
Signing an agreement will make a divorce less legally challenging if it occurs, which means less money is lost. Also, discuss delicate issues like how you would divide child custody and split up costly assets. Coming to an agreement while everyone is still getting along is preferable to the alternative.
Work On Your Financial Management Skills
If no one teaches you, you have to teach yourself. The first step is learning how to successfully budget your money. You need to know how much you’re making and spending each month, and if it’s sustainable.
Start by adding up all your income and expenses. If your income is less than your expenses, it’s time to cut back or get a second job. If your income is more than your expenses, determine how much you can put away each month in savings. A savings account allows you to protect yourself from being ruined by unexpected expenses.
The second step is learning to tell yourself no. The best budget in the world won’t help you if you can’t resist putting something on your credit card every time you want to. Ask yourself if what you’re buying is necessary. Is it more important than putting that money in savings? More often than not, the answer is no.
Develop A Job Search Mindset
I bet the last time you updated your resume was when you were last looking for a job. That seems fine on the surface, after all, you only use it when you’re looking for a job right? The thing is, job loss can come at any time. That means you need to stay in a job search mindset.
That doesn’t mean you should be applying for new jobs or checking listings… that wouldn’t make sense when you’re happy where you are. What it does mean, is to keep your resume, cover letter, and other “hire me” documents up-to-date.
Keeping those documents up-to-date means that if you lose your job today, you’re ready to start applying tomorrow. It saves you time in your job search, which can be the difference between stability and bankruptcy if you’re living on a tight budget.
Save For Unexpected Emergencies
The number one thing you can do to be prepared for unexpected emergencies is to have an emergency fund. This can be your normal savings account or a separate emergency account. What matters is that there’s enough money in it to cover at least a month of your living expenses.
Ideally, the account would cover a few months but even one month of expenses buys you valuable time. Make sure to add up the average cost of your rent/mortgage, bills, groceries, and other necessities. Because money in your emergency account will be sitting for a while, check into high-interest savings accounts so you can make money from the money you’re saving.
What Do You Do If The Worst Does Happen
Sometimes, you can do everything right and still have the worst happen. If you do find yourself facing bankruptcy, there are a few important things to remember. The first is that you don’t have to go through the process alone.
Many attorneys specialize in bankruptcy cases. You can find one to help you make the best plan to sort out your financial life. They’ll have the knowledge you need to handle a case in your specific state. For example, if you’re filing bankruptcy in Mississippi, an attorney could help you exempt $10,000 of certain types of personal property.
The second thing to remember is that it is completely possible to recover from bankruptcy. They can be removed from your record and you can financially recover. You may even find that you feel and function better once the weight of all that debt is removed.
Avoiding bankruptcy when you’re first starting your financial journey, whether single or jointly, is about creating financial plans that can serve you now and in the future. Take some time to look at your finances and make a plan that protects and serves you.
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