Bankruptcy refers to the legal status of individuals or other entities who cannot repay debts to creditors, as determined by court decree (usually initiated by debtors themselves). Although bankruptcy is one form of insolvency status available to people and entities alike, the causes of bankruptcy should not be seen as synonymous with insolvency and vice versa.
In some countries, such as the UK, bankruptcy only applies to individual petitioners, while liquidation and administration procedures (among others) apply to companies. Still, bankruptcy applies more broadly in America when dealing with formal insolvency proceedings.
There are seven critical causes of bankruptcies.
- Job loss or income reduction
- Medical expenses
- Contribute to high-interest secured debt.
- Business Expenses
- Divorce or separation-related costs
- Loss of property through natural disasters
- Poor money management skills
Job loss or income reduction.
Loss of employment or reduction of income is often one of the leading causes of bankruptcy. Losing one’s job usually entails losing health insurance, too – leading to medical bills piling up rapidly. In contrast, additional bills may go unpaid without new work opportunities as time progresses.
Reducing monthly income can also prove troublesome, making it increasingly difficult to meet monthly expenses. Should someone’s income shrink while their costs stay the same, they could eventually struggle to cover monthly expenditures.
Medical bills are a significant reason for bankruptcy. A study from Harvard revealed that 78% of defaults can be traced back to medical expenses alone – not surprising given how expensive medical care can be.
Ongoing treatment costs may also increase, leaving you struggling with medical bills and making payments difficult. If this happens, you can employ various strategies: negotiation with providers (a challenging but worthwhile effort may lead to lower rates); financial assistance programs that could assist with medical costs but might have eligibility criteria; bankruptcy can be stressful, but help is available – here.
Debt is often listed among the primary factors contributing to bankruptcy. When debtors can no longer meet their repayment obligations, their total debt becomes impossible to settle ultimately, and default occurs as a result. Various kinds of unsecured debt could contribute to this outcome, but here are a few that often lead to it:
Credit Card Debt: Credit cards can often lead to bankruptcy due to their high interest rates, making payments challenging for cardholders to manage.
Mortgage Debt: Just like other debt forms, it can result in bankruptcy. Homeowners sometimes borrow large sums for monthly payments and cannot keep up, leading to financial bankruptcy due to missed payments.
Business debt can also lead to bankruptcy. Businesses often take out loans for start-up or expansion costs, and many struggle to repay these loans in full.
- Business Expenses Each year, thousands of businesses of various sizes declare bankruptcy for multiple reasons. Of all those reasons contributing to their demise, here are five of the most prevalent causes.
- Poor Financial Planning/Management – one of the leading causes for businesses going under is poor financial planning/management practices that prove ineffective.
Without careful planning and oversight, it’s easy to fall behind on expenses and accumulate debt quickly. – especially difficult for small businesses
- Unforeseen expenses. Even businesses that run as smoothly as possible can fall prey to unexpected costs that arise without warning – from equipment failure or natural disaster, for example – but can prove hard to recover from.
- Competition. Competition in business today can be fierce; failing to keep up can quickly put companies out of business – this is especially true of industries with limited customer bases.
- Business Expenses. Managing expenses effectively poses a significant challenge for businesses. Rent, utility bills, salaries, and benefits are essential expenses that require responsible handling. Without it, any organization can quickly spiral into financial turmoil.
- Subpar Customer Service. Poor customer service can be one of the leading causes of business failure. Customers nowadays have many options when choosing their provider; should a business consistently provide subpar customer service, it could eventually lose all of its clients and be out of business within months or even days.
- Costs associated with divorce/separation: When a couple decides to divorce or separate, numerous financial implications arise. One person may become solely responsible for all incurred debt, or costs might be equally shared between partners. Regardless of the arrangement, divorce and separation are costly endeavors. Here are five frequently associated costs.
Legal Fees: To successfully divorce or separate, couples often need lawyers. Even when both parties can agree on terms for the separation and divorce amicably, many legalities still need to be resolved, and this expense could become significant depending on its complexity and duration.
Asset Division: Couples going through divorce or separation often need to divide their assets, which can be complex and expensive if numerous assets are at play. They might require professional mediation assistance to agree on who gets what.
Debt Division: Couples undergoing divorce or separation must also determine who is responsible for settling shared debts. Which can often become contentious issues between both partners. Sometimes, debt may be split equally, while in other instances, one party might shoulder all of it themselves.
Moving Costs: Divorce or separation often necessitates moving to a different city or state, incurring substantial moving expenses, including renting a truck and storage fees and buying furniture or appliances that need replacement.
Therapy: Many individuals find treatment an invaluable aid during divorce or separation proceedings, helping to deal with the emotional trauma caused by their breakups and emotional recovery. Unfortunately, insurance plans may not always cover therapy sessions – seek guidance before embarking on such expensive sessions yourself.
Loss of Property Due to Natural Disasters
One of the primary reasons for bankruptcy is the loss of property caused by natural disasters like hurricanes or wildfires; they often leave victims entirely destitute, with nothing remaining but debts to pay. Here are six of the most frequent causes related to natural disasters that lead to bankruptcy filing.
Loss of Property Value: Property loss is a primary cause of bankruptcy, often due to natural disasters. These disasters can damage or destroy homes and buildings, significantly decreasing their value. This leads to mortgages that exceed the property’s worth, resulting in foreclosure and, ultimately, bankruptcy proceedings.
Income: Lost revenue, often from unemployment post-disaster, is another critical cause of bankruptcy due to natural disasters. When people can’t return to work and stop earning a living, they face debt problems that eventually lead to bankruptcy filings.
Savings: Another critical element contributing to bankruptcy after a natural disaster is a sudden decrease in savings. Various causes can lead to bankruptcy, often due to spending savings on property damage repairs or replacements, eliminating financial cushions. This situation forces people into debt for necessary repairs, leaving them vulnerable to future bills without funds for more repairs or replacements, resulting in bankruptcies and a higher debt burden.
Employment: Job loss after natural disasters, often because businesses must close, leads to unemployment and income reduction, eventually causing bankruptcy. These factors—loss of property, savings, and employment—make bankruptcy imminent. Recognizing these dangers is crucial to avoid vulnerability.
Poor Financial skills.
Money management skills are one of the cornerstones of life. Unfortunately, however, many do not possess adequate money management abilities, which often leads to bankruptcy and its repercussions.
Various factors may contribute to poor money management abilities in an individual or an institution. One problem stemming from people not understanding money’s inner workings is their inability to understand its nuances; this leads them to make poor financial decisions with potentially disastrous repercussions. A lack of discipline also can undermine money management skills.
Without discipline, spending money without considering its long-term ramifications can be easy and quickly result in debt or financial problems. Furthermore, lacking an understanding of personal finance basics may contribute to poor money management skills; many do not grasp its fundamental principles, which leads them to make poor choices with their money.
To avoid debt and bankruptcy, developing strong money management skills is crucial. One effective method for doing so is through education on personal finances and understanding how money works in more depth than ever. Furthermore, learning disciplined spending habits and controlling spending habits will go far in helping avoid potential financial disasters.