5 Avoidable Causes of Bankruptcy

Consumer protection, Taxes

avoiding bankruptcy-1After declining for the last two years, personal bankruptcies are expected to increase in 2013 — by at least 8 percent — thanks to increases in spending and debt accumulation. Make sure you’ve considered the consequences before filing bankruptcy — and protect yourself against the pitfalls that could land you there in the first place:


In 2009, the Census Bureau reported that Americans spend $1.33 for every dollar earned. Consumer borrowing surged astronomically over the 2012 holiday season, despite lower savings rates and incomes not keeping up with inflation. If you need to get out of debt, the simple solution is to bring in more money and/or spend less. Keep track of your spending — there are apps for that!

Job Loss

While you can’t prevent the next round of layoffs at work, you can save up for emergencies. With unemployment being the sad situation it is, expert recommend having up to a year’s worth of income saved up in case you lose your job. While coming up with that much money fast is usually unrealistic, you should start by setting aside a few months worth of savings and build on it. Also, invest in affordable education to keep your skills sharp — it helps you to bounce back from a job loss more quickly.


Money problems are the top reason marriages end in divorce; the irony is that divorce is among the top causes of bankruptcy. Legal fees, child support, alimony, and the cost of keeping up two households only compounds financial woes, so think twice before splitting. Before throwing in the towel, try to make a plan with your partner for budgeting better.


You can’t control the weather, but you can — and should — get disaster insurance. Most importantly, be clear on what your homeowners insurance covers — quite often flood insurance has to be purchased separately, for instance.

Not Considering the Cost

The average cost to file for Chapter 7 bankruptcy is more than $1,500, according to the National Bureau of Economic Research. Among those fees is a charge of about $300 just for filing the paperwork with the federal court; then there are fees for mandatory pre-bankruptcy credit counseling and a debtor education course. The rest typically goes to bankruptcy lawyers. Be aware of what debts may not be wiped by bankruptcy, such as large, recent cash advances taken on credit cards or large, recent purchases. Taxes or student loans may not be wiped either, depending on how recently they became due. Divorce-related debts, such as child support or alimony payments also may not be wiped.

Consider the credit ramifications before filing bankruptcy. Bankruptcy can remain on your credit report for up to 10 years, and getting a mortgage may be very difficult for two or or three years. If you absolutely must file bankruptcy, be sure you are prepared to start paying your bills on time. To rebuild your credit, you may be able to get a credit card — but it might require a deposit.

Bankruptcy quite often is inevitable when medical expenses or other financial disasters take over your life; however, in many cases smarter budgeting and saving reasonably for emergencies is the best way to prevent hopeless amounts of debt.