Top 3 Reasons Why People Go Into Bankruptcy And Tips How To Avoid Going Bankrupt

Majority of bankruptcies are not filed by corporations and businesses. In fact, 97% of bankruptcies in the United States are personal and individual ones. Only 3% are filed by corporations, contrary to the belief of many. Bankruptcy rates have been increasing since the pandemic started. Let's take a look at what the top reasons are so you may also plan your own matters to avoid going bankrupt.

62% of the individual bankruptcies are caused by medical expenses. Contrary to the belief of many, even the insured people file for personal bankruptcies. A Harvard University study has already debunked this belief that a health insurance will keep you from filing such. 

The increasing healthcare costs can be attributed to advancements in technology and whether or not a person is afflicted with a serious or rare disease. New illnesses are also reportedly emerging so health insurance has become more expensive and complicated. 

This is also the reason why the elderly value health more than anything else. Because once you got hit by a serious illness, it can wipe out your savings and years of hard work. Prevention is better than cure and health insurance may still help in cutting some costs.

The unemployment rate in the U.S. pre-pandemic (2019) was around 3.5% according to the Bureau of Labor Statistics. This rate increased to 6.7% by the end of 2020. People could not anymore avoid going bankrupt and filing for bankruptcy because the pandemic even shut down businesses and owners were forced to lay off employees. However, this figure fell to 4.6% by October 2021, which is a good thing since the labor market is gradually recovering from the effects of the pandemic. 

This goes to show that people are not financially prepared for the worst. A passive income stream and investment funds have become a thing now. Even the younger generations have taken interest in establishing their own businesses and gradually investing in the stock market, cryptocurrency, and other investment funds to prepare for the future. Avoid going bankrupt by planning to diversify your investment portfolio and think of other ways to earn money, aside from being employed in a day job.

5% of these personal bankruptcies go into reckless spending. Most people are guilty of spending and living beyond their means. Those who have a habit of splurging leave almost nothing to their savings and retirement funds. Unexpected expenses also accumulate that may lead to high credit utilization and going into debts. 

The major unexpected expenses by Americans, aside from healthcare costs, are house repairs, car maintenance, pet health costs and unplanned travels. To avoid going bankrupt from these reasons, getting these things insured will give you a peace of mind and minimize out-of-pocket expenses. Buying cost-efficient materials and repairing small damages right away will also save you some cash before it gets worse and more expensive. These little tips will help you avoid going bankrupt because costs can accumulate over time.

Most of the reasons above are expenses that most people never see coming. The lack of financial preparation for these things are brought by the lack of knowledge how these can contribute to personal bankruptcy. You can avoid going bankrupt by preparing for these major life events.