Common Causes of Bankruptcy
Minnesota saw 3,654 new bankruptcy filings over the three-month period ending in March 2013. Out of these, only 106 were businesses; the rest were individuals. What are some of the most common causes for these individual bankruptcy filings?
1. Medical Bills
America’s expensive and unpredictable healthcare system means that even insured people can go bankrupt from medical bills. Even if the medical bills themselves aren’t the thing that trigger you to apply for bankruptcy protection, the bills may have contributed to bankruptcy by eating away at your savings and credit card spending limit.
Avoiding medical debt can therefore be a huge step towards avoiding bankruptcy. If you have a high deductible on your medical insurance, you can improve your ability to stay medical-debt-free by setting up a health savings account. This type of account allows you to make pre-tax contributions, up to a specified limit. These contributions are not taxed when withdrawn if they are used for qualified medical expenses.
Another way to stay on top of medical expenses after you incur them is to negotiate. Medical treatment is, after all, a service, and the appropriate cost of a service is by nature subject to dispute! Call the hospital or clinic and see if they are willing to accept a lump sum payment of a lesser amount, or if they have a no-interest payment plan available.
If your medical debt becomes overwhelming and you do file for bankruptcy, keep in mind that medical debt, as unsecured debt, may be eliminated in a Chapter 7 case. It can also be reduced under a payment plan in a Chapter 13 bankruptcy case.
2. Job Loss
With the economy still in the doldrums as far as the job market goes, this scenario is familiar to many. Emergency funds are all well and good, but it’s hard to have a fund that lasts the length of time it can currently take to find a new job. Losing medical insurance can combine job loss with medical expenses into a potent, bankruptcy-inducing cocktail.
If there’s any way to start searching for your next job before you are laid off, this is one way to improve your chances of avoiding a big hit to your savings, since you’ll have a better chance of finding a job while you’re employed. You may be able to avoid a gap in employment altogether.
If you’re laid off before you’re able to find another job, make sure to apply for unemployment benefits, and negotiate with your employer about a severance package.
3. Spending and Credit Card Debt
Keeping expenses under control–easy to say, harder to do. The poor job market means many salaries are going down or at least not keeping up with inflation, and it can be hard to adjust expenses accordingly. This is where your local credit union can be surprisingly helpful; go in and talk to them about how to reduce your expenses and make (and stick to) an appropriate budget.