Top 5 Reasons for Bankruptcy & How to Steer Clear of Them!

Contrary to popular opinion, bankruptcy is not just related to a single cause but is often a result of various factors. While financial irresponsibility, like excessive debt, certainly plays a role, there are numerous voluntary and involuntary circumstances that may lead someone to declare bankruptcy.

Let's discover the top 5 reasons why people all around the world end up in this situation and the best ways to avoid it.

5 Speed-Bumps of Bankruptcy

Bankruptcy filings commonly stem from income loss, steep medical bills, unmanageable mortgages, overspending, or providing financial aid to loved ones. Often, a combination of these factors triggers bankruptcy proceedings.

1- Income Loss

The loss of a job and the subsequent loss of income can place immense financial strain, particularly for those already living paycheck to paycheck.

A prominent example of this is observed across the continent in the US. For instance, a survey in June 2023 revealed that 61% of people live on a paycheck-to-paycheck basis, leaving little room for financial setbacks.

How to Save Yourself?

Start a small savings plan that you can gradually step up. You can open a savings account in a reputed bank with minimal or zero maintenance fees and earn good interest.

2- Medical Expenses

Medical bills rank among the top reasons for bankruptcy filings. Serious health issues can lead to job loss or create financial burdens, especially if individuals lose their job-based health insurance.

While several public health programmes exist to maintain minimal coverage, the associated costs can be prohibitive for many.

How to Save Yourself?

Invest in comprehensive health insurance. Even if it’s with minimal riders, go for one that suits your current budget and still covers major costs.

Policybazaar.ae presents a one-stop destination to compare options and find that one policy that is made for you, right within your budget!

3- Unaffordable Mortgages and Foreclosure

Housing-related debt, including mortgages and home equity lines of credit, constitutes a significant portion of household debt all over the world.

Lenders sometimes approve loans beyond what borrowers can comfortably repay. This puts them at risk of failed repayments, especially if faced with job loss or rising interest rates.

How to Save Yourself?

Go for home loans with minimal interest/profit rates and don’t forget to check the fine print for foreclosure charges. Also, take time out to compare home loans from different providers to find the one that suits your requirements the best. 

Another important option here is in the form of loan or mortgage insurance, which can cover your outstanding amount if you’re not able to repay amidst unfortunate circumstances. 

4- Overspending

Living beyond one's means often results in overwhelming debt. For instance, maxing out credit cards on unnecessary purchases can lead to a cycle of increasing debt due to high interest costs.

How to Save Yourself?

Establish a budget and build an emergency fund to mitigate this risk. Additionally, keep the maximum spend limit on your credit cards as per a set budget every month.

You can also go for credit cards that offer features such as cashback and loyalty points to save even more.

5- Providing Financial Support

Assisting family members financially, whether adult children or ageing parents, can strain one's finances. While it’s natural to assist our loved ones in unfortunate circumstances, this can also lead to personal financial distress, especially if the lending individual doesn’t have any significant income or assets.

How to Save Yourself?

While we cannot always predict future incidents, it’s always good to plan accordingly. For instance, secure health insurance for senior citizens as soon as possible. Similarly, for your child’s education, you can get a child education plan that can create a significant corpus over time.

Furthermore, you can do your bit in spreading awareness regarding finances. Make sure to inform your loved ones about insurance and investment products that can financially shield them in dire scenarios.

The Way Forward

Although the most common repercussions of bankruptcy are well-known, an oft-ignored spot is your credit Score, where the impact can stay for some years. This can be disadvantageous for you in the long run as it can limit your ability to get credit later.

All in all, it’s crucial to take proactive steps in managing debt responsibly and maintaining financial stability while you still have time. While you can certainly make changes in all the domains discussed above, you can also start with the one area where the impact is the most significant before moving on to cover others.

Policybazaar UAE: Helping you navigate the wilderness of the insurance world!

By - Tashika Chopra