6 Terrifying Reasons Entrepreneurs Can Go Bankrupt

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Bankruptcy is a major problem for people living in the United States. Even though rates have gone down since the Great Recession, about 770,000 people file for personal bankruptcy each year.

Despite being a fairly common phenomenon, a lot of people still have misconceptions about what actually leads to bankruptcy. Here are the top six reasons people go bankrupt.

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Shutterstock Licensed Photo – By fizkes

Medical Bills

A lot of people assume that the majority of people who end up in bankruptcy are totally at-fault for their financial misfortune. But this is actually a misnomer. Medical expenses are by far the top cause for people going bankrupt.

A Harvard University study showed that medical bills account for over 60 percent of personal bankruptcies. This isn’t simply due to a lack of insurance. Of those in the study who filed for bankruptcy due to medical costs, just under 80 percent had insurance of some kind. Some treatments can cost obscenely large sums of money—and aren’t necessarily covered by insurance. In these cases, people are forced to choose between their lives and their savings.

Loss of Employment

Job loss is another major factor that forces people into bankruptcy. It’s difficult to maintain your lifestyle and make payments on bills when you suddenly lose cash flow. Considering that about 20 percent of the U.S. workforce was laid off at some point between 2009 and 2014, it’s not surprising this issue plays a big role in bankruptcy claims.

Unemployment benefits are supposed to provide a safety net for people who lose their jobs. However, not every understands how to take advantage of this system. Plus, it often takes people a long time to find a new job—especially in a slower economy.

Overusing Credit

Of course, overuse or mismanagement of credit is a major determinant in whether someone will have to file for bankruptcy. There are a lot of reasons that cause people to overuse credit. Regardless of whether it’s for necessities or extravagant expenses, there are solutions for people who want to avoid bankruptcy.

Working with a debt negotiation agency can be a way out. Freedom Debt Relief is one of the most respected names in this sector. The organization has helped countless people get their lives back on track, without having to file for bankruptcy. Individuals with extreme debt issues might qualify for the Consolidation Plus program. Even people in dire situations can get out of debt through these services.

Divorce or Separation

A lot of marriages end in divorce—especially those between individuals who’ve already been through one. Divorce isn’t just hard on people from an emotional standpoint. It also takes a big toll on your finances. Couples will need to divide up their assets and liabilities—and both sides will likely need to hire specialized lawyers. Divorce can be an impetus for pushing people with money problems over the edge.

Lack of Emergency Funds

Having a safety net can be one of the most effective ways to avoid bankruptcy. Unfortunately, most people in the U.S. have very modest amounts of money stashed away. About a third of people have no savings at all. This can lead to catastrophe in the case of an emergency. People who find themselves with a large, unexpected expense might have no other choice than to file for bankruptcy.

Budgeting Failure

Creating a budget is one of the best ways to get your finances under control. Regardless of your income, you can end up in big money trouble if you don’t keep your spending within your means. Everyone should keep track of how much they’re spending each month. This needs to include all expenses—from housing to streaming subscriptions. Individuals who effectively budget their money will be more likely to save—and hopefully avoid financial pitfalls down the line.

There are a lot of reasons why people end up in bankruptcy. None of these paths are desirable. Knowing the most common causes for bankruptcy will hopefully help you stay out of financial trouble.

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About author
Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.