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Causes of Bankruptcy | Reasons People Go Bankrupt

Causes of Bankruptcy

Bankruptcy is a legal process that can help people who are in debt and have no other way of paying back what they owe. It’s a last resort for those who are struggling with their finances and can’t pay off their debts. There are many causes of bankruptcy, but the most common one is not having enough income to pay off your debts.

The following section will break down some of the most common causes of bankruptcy or how someone go bankrupt as well as some tips for how to avoid it.

Main Causes of Bankruptcy

The common causes of bankruptcy include:

  • Divorce/Separation

A report on the causes of bankruptcy found that 14% of all bankruptcies filed were due to marriage or relationship breakdown.

The financial cost of divorce is expensive, and can very well force the person to file for bankruptcy. Aside from legal costs to pay, the current income of both partners will now have to include the cost of two households instead of one.

For many people, caring for two households after divorce or separation on the same income level is just not doable and this can create tremendous financial problems that cause them to file for bankruptcy.

  • Medical and Health Care Expenses

Medical reasons caused by a disability or illness is also cited as the primary cause of bankruptcy particularly for Canadian seniors 55 years and older. A major illness, injury or other health related problems can easily affect both your income and living expenses and lead to debt problems that may force you into bankruptcy.

See Also: Investment Banking for Beginners

For one, not all medical costs are covered by health care or insurance so you would need to take out cash to cover these expenses.

If you don’t have enough savings in your bank account, you would have to take out a loan which will charge interest. Debt can pile up easily if you miss payments on the loan.

Not only that, you would have to take time off work to recover from your health problems which would affect your pay. Without supplemental insurance benefits to cover every-day living expenses until such time you can go back to work, it would be easy to use credit cards and pile up more debt.

Whatever  savings you have can only support you for a short period of time. Even if you have disability income, that would still not be enough to pay off your debts and living expenses.

  • Job Loss or Reduced Income 

An unexpected job loss or if you are now forced to make ends meet on a reduced income can be equally devastating to finances, especially if you lost the job with little or no prior notice and cannot get severance packages.

If there is no emergency fund, you don’t have anything to draw on to cover expenses and so it would be very necessary to use credit cards to pay bills. 

Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous.

See Also: Licensed Money Lenders vs. Banks

One of the first things to do when faced with a job loss or have your hours reduced, is to figure out ways to lower your spending immediately.

And one of the best ways to prepare for a job loss is to build yourself an emergency fund so that there is ready cash to pull out when the need arises.

  • Unexpected Emergencies

A death in the family, major car or home repairs, natural disasters like a fire or a flood, are some things in life that we cannot control that can lead to financial disaster.

If there is no adequate savings and insurance, debt problems may become overwhelming and can lead to bankruptcy. No matter what the cause, bankruptcy is a legal solution that can help eliminate overwhelming debt problems. 

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