Despite what you see in movies or TV (ala Michael Scott in The Office ‘declaring bankruptcy’), bankruptcy is more common than you’d think and not just for the rich and famous. Even being young does not protect you from falling into a financial situation you can’t pull yourself out of. The past couple of decades have seen a steady rise in the number of people who can no longer pay off their debts – from student loans to mortgages. Here are the most common reasons why people go bankrupt.

Medical expenses

According to a study in 2019, about 60% of bankruptcies in America are due to medical costs. Patients cannot pay their medical expenses because they cannot make an income while they are unwell. Even with health insurance, issues such as job losses and high deductibles significantly impact medical expenses. For example, serious health issues can quickly drain hundreds or thousands of dollars every month- emptying college funds and life savings. You can avoid falling into medical debt by as best you can, having quality health insurance, having a good FSA or HSA and working closely with hospital collection departments as they will often have payment plans that they can offer, or write them off depending on your income and assets.

Unemployment

Whether as a result of a resignation, termination, or layoff, losing one’s income from a job is another common reason many young people find themselves in debt that can lead to bankruptcy. While some may be fortunate enough to receive some kind of severance package, others hardly receive prior notice. Layoffs or furloughs like this are probably something we’re aware of in this COVID world. This situation makes it difficult for them to create a plan, especially when they do not have extra money, such as an emergency fund. You can avoid falling into debt after being laid off by firstly having an emergency fund. Nobody; whether rich or poor should go without an emergency fund. I’ve also thought about having backup plans in place, whether knowing which side hustles I’d immediately start or keeping my resume up to date and having ideas of other roles I could apply for.

Separation or divorce

The dissolution of marriage creates many financial burdens – from legal fees and financial affidavit preparation to child support and the division of assets (not to mention the cost of financing two different households after a separation). In some cases, the legal fees and child support payments are enough to cause people to go bankrupt. The situation is worsened by the increase in divorce rates amongst young couples after a few years of marriage. I’d recommend trying to settle as amicably as possible and avoid a long and drawn out trial.

Excessive or inadequate usage of credit cards

Credits cards make it all easy to spend money, especially on things that we do not need. For most people, especially the young ones without a proper sense of financial discipline, the excessive use of their credit cards has caused debt and bankruptcy. Also, improper use of credits such as installment debt, car loans, and other kinds of loan payment usually gets out of control to the extent that the borrower finds it almost impossible to make the minimum payment for each debt. Avoid this by using credit cards responsibly – don’t spend more than you have and if you do have to go into debt, work quickly to get rid of it!

Unexpected expenses

Life always takes us by surprise at some point; for instance, natural disasters like floods, earthquakes, or fire accidents. In such situations, properties can easily be lost. When the lost or damaged property has not been insured, replacing them can be expensive and often leads to bankruptcy. Many young property owners are either not aware of the importance of taking up insurance coverage or only hesitant. Either way, when such unexpected events occur, they cause a lot of financial strain in recovering or paying for damaged properties. Avoid this risk by having good insurance and of course an emergency fund!

Summary

To wrap things up, it is wise to try as much as possible to manage your money as effectively as possible. Create a “rainy day” account for emergencies, start investing, and adopt money habits to avoid bankruptcy and its effects.  

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