Five Surprising Things That Could Drive You to Bankruptcy

/ BY / Personal Finance

Most of us know that bankruptcy is one of the worst things that can happen to your finances. While it does eliminate crippling debts, it destroys credit for years in the process, making it difficult to purchase a home, car, or secure any line of credit for a long time.

Rarely, however, does bankruptcy happen overnight. There are often indicators that lead up to serious money trouble and eventual bankruptcy, many of which can be controlled.

The following situations could put you at risk for bankruptcy.

  1. You don't have adequate health insurance.
    Health insurance and bankruptcy may seem like a weak link, but medical bills are the number one cause of bankruptcy in the United States. In fact, one study found that 62% of all bankruptcy cases in the United States stem from excessive medical bills.

    This doesn't just apply to those who don't have insurance. Inadequate health insurance coverage can also drive you to bankruptcy. This is particularly true for high deductible plans. Most of the people in the study had over $5,000 in outstanding medical bills or owed more than 10% of their pretax income.

  2. Your job situation isn’t secure.
    It goes without saying that it takes money to pay the bills. Not surprisingly, the second biggest contributor to bankruptcy filings is unemployment or loss of income. This is especially true for those who don't have a savings account to help them get through a period of unemployment or reduced hours.

  3. You have multiple maxed out credit cards.
    Credit cards that are at their limit often don't necessarily indicate out of control or irresponsible spending. In fact, high credit card debt often goes hand-in-hand with the other top risks of bankruptcy. For example, if you lose your job, you may suddenly find yourself charging all of your living expenses. These costs add up quickly, driving your card balances up in the process.

  4. Your marriage is on the rocks.
    Divorce is another major cause of bankruptcy. There are a number of reasons for this. Going from a two-income home to a one-income home can wreak havoc on finances, especially if one spouse earned significantly more than the other. Expensive child support and spousal maintenance payments on top of living expenses can also drive divorced couples to bankruptcy. An increased use of credit also tends to occur following a divorce, meaning more debt.

  5. You live in an area with a high rate of natural disasters.
    Natural disasters rounds out the top five contributors to bankruptcy. Most people who go bankrupt as a result of a natural disaster had homeowners insurance but were inadequately covered or had very high, unaffordable deductibles. Places of employment that are destroyed or missing work due to a natural disaster can also lead to bankruptcy.

Preparing For the Unexpected

Preparation is crucial for avoiding bankruptcy, even in unexpected or potentially financially devastating situations. You can reduce the effects of these risk factors by:

  • Increasing your savings account. The more money you have in your savings account, the better, but many financial experts recommend you have at least 3 months’ worth of expenses set aside to cover a job loss or emergency.
  • Paying down debt. If you carry balances on your credit cards, work to develop a debt reduction plan and pay them down as quickly as possible.
  • Controlling spending. Unabashed spending is a sure way to eventual financial ruin. Wait to make purchases until you can afford to pay cash, and stick to a budget to help you live within your means.

Bankruptcies are often the result of circumstances outside of our control. However, many bankruptcies can be avoided simply by preparing for the unexpected.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.