Preventing Bankruptcy: 3 Common Causes & 3 Ways You Can Avoid it

By Myles Leva

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Last Updated: December 30, 2022

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There are key measures that everyone should use to prevent bankruptcy.

Fortunately, there is a lot of information available regarding the causes of bankruptcy. Like many financial problems, prevention is better than a cure. Knowing how to steer clear of bankruptcy is the best medicine.

Of course, if you’re already seriously considering bankruptcy, there are more reactive measures you’ll need to take. In most cases, there are still a few things you can do to avoid a declaration of bankruptcy.

In this article, we will cover all of these topics on how to prevent bankruptcy.

 

 

What are the three 3 most common causes of bankruptcy?

The American Bankruptcy Institute (ABI) identifies three main causes of personal bankruptcy in the US:

  1.  Loss of income (for most people, this means job loss)
  2.  Medical expenses
  3.  Divorce

After these main causes, the runners-up are unaffordable mortgages and foreclosure, followed by living beyond one’s means.

 

How to avoid bankruptcies

Let’s look at some of these causes and the main ways to avoid having them lead to bankruptcy.

 

Loss of Income

This predictable cause is easily understandable and requires little explanation.

Most people rely on one source of income and build their budgets and lifestyles around it. Once this income is cut off, it’s very easy to spiral into bankruptcy. The cost-of-living crisis affecting much of the world makes this even harder to handle.

Ultimately, emergency savings, insurance, and extreme budgeting measures are the only preventative options.

 

Medical Expenses

The ABI identifies the complexity of health insurance policies in the US as an aggravating factor.

Some unexpected health problems may not be covered and some policies’ definitions of “pre-existing conditions” may leave you uncovered, which can be unexpected, terrifying, and financially ruinous.

If these costs enter the thousands, which they often do, many individuals and families are left with bankruptcy as their only option. The ABI specifies that it’s especially bad for 20-somethings with healthy lifestyles, as they may be hit by catastrophic injury or illness, without adequate coverage.

Unfortunately, the only way to avoid this challenge for most people is a thorough investigation into the frustratingly complex world of medical insurance policies. You need to know the details of your coverage, including hospital networks and what constitutes a pre-existing condition, according to your policy.

 

Divorce

Divorce and separation are very expensive. If one partner is responsible for a larger share of associated debt, they may find it unmanageable.

Given the legal fees, legal complexity, personal complexity, and unexpected nature of divorce, it will vary from person to person. You could look at different ways to keep your divorce expenses down, such as avoiding a trial by going through mediation or a collaborative divorce.

 

Housing Crises

Mortgages are the largest single portion of household debt in the US, surpassing credit cards, car, and student loans by a large margin.

Avoiding a mortgage-driven bankruptcy may require one or more of several options. Preemptively downsizing may be the best option in many cases. Using home equity to downsize is often a practical option. While interest rates for home equity financing are often low, in the long term, it is risky to rely on it.

 

Lifestyle/Finance Balance

Read our articles about budgeting here.

This simple category covers most other situations where individuals and families fail to live within their means. It’s a simple problem of spending outpacing earnings.

This can cover a wide variety of problems, many involving high-interest credit card spending. Regardless of the causes, budgeting and more responsible use of credit are the only options for avoiding overspending.

 

 

What are 3 things you can do to avoid bankruptcy?

Broadly speaking, there are a few things most people facing bankruptcy can do.

 

Budget Options

This covers normal budgeting, extreme budgeting, and all kinds of lifestyle downsizing.

A barebones budget is a preferable option to bankruptcy if you feel like you’ve crossed the financial line of no return.

 

Second Job

This covers a second, part-time job, or other sources of secondary income.

If you’ve got any transferable skills from your main job, you may be able to use them in part-time or freelancing capacities.

Alternatively, you could learn a new skill or take side gigs such as landscaping or shoveling snow. Online, there are even more opportunities to explore.

 

Selling

A yard sale, among other types of sales, may be a better alternative to bankruptcy.

Many people have a lot lying around that can add up to a lot should they go on a selling rampage.

Your options for selling your items are extensive, with countless online options for selling to others.

If you’re going to take this course of action as an alternative to bankruptcy, be ready to work hard. Put all of your items of any value that you are willing to part with online and/or in your yard sale. Keep up with all the messages you get and be prompt in your responses.

 

 

Conclusions

There are many ways to prevent bankruptcy. If you take preventative action earlier, it will be easier to avoid the most difficult paths away from declaring bankruptcy. However, there are always things you can attempt so you can avoid the long-term consequences of bankruptcy.

Photo by Nicola Barts

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