The number of personal bankruptcies in the United States has been steadily rising over the last few years and it’s not difficult to understand why. The average person just doesn’t have the financial resources needed to deal with big life changes such as medical emergencies, divorce, or being out of work for an extended period of time. The following five reasons explain why people go personal bankrupt and what you can do to avoid it from happening to you!
#1) Unplanned medical expenses
Unplanned medical expenses can quickly drain a bank account. If you are not prepared for an accident or unforeseen illness, then you could easily find yourself having to choose between making your house payment or paying for unexpected medical bills. The only way to avoid falling into a hole of debt from these types of financial events is to make sure that you have planned for them. You should have health insurance and an emergency fund that can help if something does happen. With these precautions in place, it will be much easier to avoid falling into bankruptcy after an unplanned event happens.
#2) Car accidents
Your auto policy, much like your health insurance, is meant to provide financial protection in case you’re in an accident. Whether it’s you who caused it or someone else, if you get into a crash that isn’t your fault and someone sues you for damages, your insurer can help pay those claims. Just be aware that different states have different laws on what car insurance covers. For example, in some places no-fault policies cover property damage and medical bills after accidents — but not injuries to passengers in other cars — while other states require liability coverage for people injured in a crash that was your fault.
Attorneys for personal injuries can help you navigate the confusing route of car accidents, damages, and liability.
#3) Major home repairs
Experts advise that you have enough set aside to cover between three and six months of living expenses. This should be enough time to get back on your feet, unless you’re trying to pay off those pesky home repairs (refrigerator, roof) or pay for major medical bills. And if you don’t want to find yourself relying on food stamps, make sure you save up at least a couple thousand dollars for emergencies.
#4) Unexpected job loss
Two out of every five Americans have no savings set aside for an emergency. One in five has less than $500. (4) To protect yourself from unexpected job loss, it’s important to make sure you have enough money on hand to meet your basic needs for at least six months to a year (e.g., food, shelter). An emergency fund can take care of that—but only if you don’t need it! Setting up an automatic transfer of money each month into a savings account is an easy way to protect yourself against one small emergency snowballing into another financial crisis. Yes, cutting back on spending will help you accumulate funds faster, but not having cash on hand leaves you vulnerable in case a more serious problem crops up down the road.
#5) Credit card debt
Credit card debt happens when you spend more than you earn. The good news is that there are several steps you can take to rein in your spending and reduce your debt. First, establish a budget that includes all of your expected expenditures, including living expenses, bills and savings goals. Next, track your income and spending to make sure you’re following through on your budget. If your expenses consistently exceed what’s in your budget or you’re struggling to stick with it for two weeks straight, then it’s time to start making cuts somewhere else – like dining out less or cutting cable. And remember: Just because you can afford something doesn’t mean you should buy it!
