Have you ever spoken with someone after they filed for bankruptcy? They might rattle off a few reasons why they couldn’t avoid it, but after the conversation ends and you both depart, you find that you’re still not satisfied with their response. In fact, you might even be left scratching your head thinking, “That bankruptcy sounded incredibly stupid. If they would have just thought for a second, it could have easily been avoided.”
After hearing my fair share of bankruptcy stories, I’ve often had the same thoughts. Just recently though, I finally decided to sit down and do the research to find out just how many bankruptcies are due to stupidity.
In reviewing the bankruptcy trends over the last 10 years, it didn’t come as much of a shock that bankruptcies were at their highest point in 2010, just a couple of years into The Great Recession. What became intriguing though, was the striking correlation between the U.S. unemployment rates and the bankruptcy filing rates.
As one can pretty easily deduce from the chart above, when unemployment rates go up, so do bankruptcy filings. When the rate of unemployment goes down, the rate of bankruptcy filings also follow suit. While this may seem intuitive to many, it just didn’t seem quite right to me. With a little bit of savings or investments, I would suspect that people would be able to last a year or two before they actually file for bankruptcy. However, this graph would suggest that in times of hardship, people find themselves in trouble almost immediately – likely because they were spending beyond their means or had little to no savings.
What Are the Top Causes of Bankruptcy?
Before I immediately point my finger at everyone that filed for bankruptcy in their lifetime (while shouting, “You’re all stupid! You should have prepared for hardships!”), I decided to climb down off my pedestal and do my best to discover the reasons why so many people file for bankruptcy each year. According to Investopedia.com, the top 5 causes of bankruptcy are as follows:
- Medical Expenses
- Job Loss
- Poor/Excessive Use of Credit
- Unexpected Expenses
An alarming 62% of those that filed for bankruptcy attribute their financial downfall to medical bills, and an even more alarming 78% of those people said they actually had medical insurance (it’s a good thing I got down from that pedestal, huh? ;)). Diseases such as cancer can be incredibly costly to treat, and many times only a portion of the expenses are covered by insurance, leaving the patient with stacks of medical bills totaling $100,000 or more. For these unfortunate individuals that thought they were protected from financial ruin, I cannot point my finger.
However, 38% of bankruptcy filings attribute job loss, poor use of credit, divorce, and unexpected expenses to their financial demise. Each one of these reasons could have easily been avoided with fewer stupid debts and more savings. Couple this with the 14% of individuals that went bankrupt because they didn’t have medical insurance, and we can quite confidently say that 52% of bankruptcies are due to stupidity.
If you had to venture a guess, what percentage of people would you say are living paycheck to paycheck? Meaning that if something catastrophic happened, they would not be able to come up with the money to cover six months’ worth of expenses. 25%? 50%? 75%?
The amount of people living paycheck to paycheck is absolutely alarming. CCN Money reports that 76% of people are living a paycheck to paycheck lifestyle. These people could not cover their expenses for six months, and 50% of those interviewed would not even be able to cover their expenses for three months! And, 27% of those surveyed had no savings whatsoever.
This survey (along with the millions of others that show Americans aren’t saving enough) is excellent proof for the leading chart in this article. When hardships come such as job loss, too much debt, divorce, or unexpected expenses, 27% of Americans would be in trouble immediately and 50% would have to surrender after less than three months of hardship. The statement that 52% of bankruptcies are due to stupidity is becoming more believable isn’t it?
How to Avoid Your Future Bankruptcy
Nobody ever plans to go bankrupt, but many could easily avoid it. The method is simple:
- Live with as little debt as possible
- Keep six months’ worth of expenses in savings
That’s it. Do these two things and you won’t become part of the 52% that go bankrupt because of stupidity.
If you’d like to avoid bankruptcy altogether (in other words, avoid going bankrupt even if you’re diagnosed with a terrible disease), then I would suggest that you get radical. Start tracking your net worth and grow it as fast as possible. Do this by increasing your income and by cutting your expenses in half. This will put you on the fast track to an unbelievably large net worth, which should keep you from ever having to utter the word, “bankruptcy”.
Do you think that over half of all bankruptcies are due to stupidity?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.