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Most Common Ways That People Fall Into Personal Bankruptcy

Author: Carol Evenson
by Carol Evenson
Posted: May 24, 2018

Personal bankruptcy is a fact of life in a capitalist economy. The ups and downs of the economy cause many households to enjoy prosperity before a rapid decline. In an era where most people live paycheck to paycheck, debt has become increasingly difficult to manage. Many people have little choice but to gain a fresh start through bankruptcy. Medical bills, high-interest credit card debt, and lack of insurance are three of the most common ways people fall into bankruptcy.

Medical Bills

In the United States, medical bills are the most common cause of personal bankruptcy. Estimates of the number of bankruptcies caused by medical bills varies from 25- to over 50 percent of filings. It's hard to pinpoint the exact figure because many bankruptcies are triggered by a variety of circumstances, such as high medical bills and a job loss combined together. Also, bankruptcy filers are not required to state the reason they chose to file. To determine the cause, studies must analyze the type and amount of debt discharged in order to determine the principle causes of insolvency.

Without question, medical bills top the list. Many people wonder how to prevent falling into medical-related bankruptcy. There are a few precautions people can take, as noted in The Balance, though one of the reasons medical bills top the bankruptcy-cause list is that people have only limited control of their health.

Avoiding illness or injury certainly keeps the medical bills away. Dropping bad habits like smoking, drugs, and excessive alcohol intake reduce the prospects of many illnesses, as does a healthy diet, regular exercise, and weight control. Avoiding too much sugar also helps, as diabetes is one of the more expensive illnesses to treat.

Adequate health insurance makes a huge difference. Uninsured people can rack up enough medical debt to go bankrupt almost overnight. Those with high deductible and coinsurance requirements should, if possible, contribute money to a health savings account (HSA), These tax-advantaged accounts can be used for out-of-pocket expenses, alleviating medical debt after or during an illness.

Credit Card Debt

For anyone who has struggled to pay off high interest credit cards, it comes as no surprise that credit card debt plays a major part in most bankruptcies. Often, people with high medical bills also have large credit card debt. When an illness strains the budget, credit cards often become the stop gap. If the debtor then cannot generate the income needed to pay off the cards, bankruptcy follows.

In an era where the majority of Americans live paycheck to paycheck, unexpected expenses or job losses often result in high interest credit card debt. The increased monthly obligations often result in additional financial strain, creating a vicious cycle of delinquencies. Once accounts fall behind, penalty interest rates and fees are added on, creating a situation where debt becomes unmanageable.

If you are in deep credit card debt, experts recommend considering bankruptcy if you lack the ability to pay off the debt, have no or limited nonexempt assets, are being harassed by bill collectors, face creditor lawsuits, or are subject to wage garnishments.

No insurance

Lack of health insurance, auto insurance, home insurance, or renters insurance can trigger bankruptcy. For example, if you are found at fault for an auto accident and have no insurance, a court may subject you to ruinous wage garnishments. If a house fire erupted and you had no home insurance, the costs of repairs, on top of still owing the mortgage, could easily result in a loss of all your assets, leaving you with no choice but bankruptcy.

Renters insurance protects not just the contents in your rental unit, it also protects you from liability. For example, if you were found at fault for causing a fire that damaged another tenant's property, you could be subject to ruinous wage garnishments that force you into bankruptcy. A cheap renters insurance policy can prevent this type of catastrophe.

There is no way to fully insulate yourself from going bankrupt. In a topsy-turvy economy, many people find themselves stuck with unmanageable debt. The best protection is solid financial planning. By having an adequate emergency savings fund and insurance, you are better prepared to weather financial disasters and far more likely to stay out of bankruptcy.

About the Author

Carol also is passionate about health and fitness and stays active on her free time. She enjoys hikes and participates in multiple marathons. She loves learning to new tips on health and enjoys sharing her knowledge with her readers

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Author: Carol Evenson

Carol Evenson

Member since: Nov 24, 2017
Published articles: 35

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