The first step in figuring out how to avoid pitfalls is knowing where the pits are, so it’s always a good idea to take a peek into the most common causes of bankruptcy out there. Especially since bankruptcy is seldom unavoidable. Insurance, smart decision making, and working alongside specialized law firms like the Cloud Peak Law Group can all help you protect your assets and ensure the stability of your financial life.
With that in mind, here are some of the most common causes of bankruptcy across the United States. And some of the ways in which these can be prevented.
1 - Medical expenses
There is a common misconception that the reason why people go bankrupt from medical bills is that they don’t have insurance. And while that is true in some cases, it is not the whole story. Dealing with serious medical disabilities and long stays in the hospital can be financially ruinous even if insurance covers all medical expenses.
The issue isn’t just money going to medical bills. It’s also the fact that it can be hard or impossible to make any money while stuck in a hospital recovering or undergoing treatment. And when a family only has one breadwinner, that can lead to financial ruin relatively quickly. Especially if the family has a lot of debt.
These challenges are the reason why medical expenses are often either the biggest cause of bankruptcy in America or the Top 3, depending on the year. And one way to overcome these challenges, on top of getting health insurance, is to either have a sizable savings account or to pay for income protection insurance. Which is a type of insurance that will partially or totally replace a person’s salary if they are unable to work for a long period of time.
2 - Job loss
Bankruptcy due to job loss can also be a complex affair. Bankruptcy can be caused by the immediate lack of income, yes, but that’s seldom the only issue. Since most people also have their health insurance tied to their work, sudden job loss could also leave them on the hook for upcoming medical bills and having to pay for their own prescriptions, both of which can quickly dry up money reserves.
Like medical bankruptcy, job-loss-related bankruptcy also can be prevented by either having enough savings and assets to shoulder the financial strain caused by sudden job loss, or by having insurance. The damage caused by sudden job loss can also be mitigated by getting employment protection insurance.
3 - Divorce
There are a variety of ways in which divorce can cause financial ruin. The biggest issue happens when the divorce is highly contested by one of the parties. Depending on the jurisdiction where the divorce is taking place, if one of the parties doesn’t agree to the procedure both parties might be forced to take the issue to court. Which is not only stressful and time-consuming but can also cost a small fortune in legal fees. Combine that with the separation of assets between both spouses, and a bad divorce can be enough to leave one or both parties in deep financial trouble.
Unlike with other items in this list, “divorce insurance” isn’t a product that exists. Signing a prenuptial agreement can make divorces easier and less financially straining, but if you are looking at an upcoming divorce and you didn’t sign a prenup, there are still ways to protect your finances. The biggest of them is to make sure your spouse is on board for the divorce and try to make it as amicable as possible.
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