The Top Causes of Bankruptcy: Are You Exposed?

Financial managers often note that there are three pillars of wealth: Income, Investments, and Insurance. While two of those are easy to understand, the third is often neglected. When we look at the leading causes of bankruptcy, the last of these three pillars can often prevent you from incurring significant costs. People don’t generally plan on going bankrupt when they budget appropriately, but unexpected expenses can wreak havoc on personal finances. As we take a look at the leading causes of bankruptcy below, it might be worth considering if you are exposed. Maybe it’s time to get that insurance after all.

1. Medical Expenses: Members of the military often take for granted the benefits that Tricare provides. Medical expenses are responsible for nearly 2/3 of all bankruptcies in the US as rare medical conditions and accidents can cost hundreds of thousands of dollars. Luckily, through Tricare, service members have options to reduce the likelihood that these bills add up both while serving on active duty and upon completion of their time in service.
2. Job Loss: The second pillar of wealth is often required to maintain an individual’s or family’s lifestyle. If you are living beyond your means or don’t have an emergency fund, it may be worth considering saving up in case you do experience a period of unemployment. Perhaps your family has two incomes and you live paycheck to paycheck. Consider the potential impact of the loss of a job when determining how much you need for an emergency fund. A significant period of unemployment could lead to financial strain and bankruptcy.
3. Poor Use of Credit: This cause of bankruptcy is easily preventable if you understand how credit works and use it appropriately. Just because you are approved for a certain credit card limit or car loan amount does not mean you should spent up to your limit. Paying bills on time also helps prevent payments from getting out of hand as you avoid penalties, late fees, and interest. Over time, poor use of credit can lead to excessive debts and bankruptcy.
4. Divorce: Divorce will likely cause your credit score to drop but it may also lead to bankruptcy. Expensive legal fees, alimony payments, and the splitting up of assets might cause you to owe more than you are worth. Working with a professional to mitigate as much of these negative effects as possible might help in the long run as you work through your divorce.
5. Unexpected Expenses: Accidents happen and they can be incredibly expensive. Unexpected expenses may range from your air conditioning going out to a freak flood damaging your home when you don’t have flood insurance. While we can’t predict many of these events, ensuring that you have insurance will help you in the event of the unexpected. Checking to see if your home is in a flood zone and purchasing flood insurance could help you avoid significant costs in the event of a natural disaster.

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