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7 Top Reasons For Bankruptcy (And How To Avoid It)

Financial distress and bankruptcy is not uncommon. You will find many such cases around you.

Except for a few rare instances, the blame primarily lies with the person and not the circumstances. Many people live their life in the (false) belief that "bad things won't happen to me".

As a result, they are not adequately prepared to deal with the situation, should such an unfortunate event happen to them.

Discussed below are some of the common instances that can trigger serious financial issues, leading ultimately to bankruptcy.

1. Steep costs of medical treatment
Hospitalization of self or any of the family member(s), is among the most common causes of financial distress. We all know that diseases have become quite common. We also know how expensive it is to treat even the normal ailments.

And, God forbid, if it is some critical illness. Then the treatment costs are exorbitant, which can easily lead to bankruptcy.

Health insurance cover is a highly economical and efficient solution to this risk of steep medical bills. Learn how to build strategic security system against healthcare expenses.

2. Inadequate health insurance cover
Unfortunately, only a small percentage of population in India has a health insurance policy.

More unfortunate is the inadequate insurance cover in most of these cases. Since the sum insured is small, it is often inadequate to fully reimburse the medical expenses.

Super Top-up health insurance policies are the ideal way to upgrade your limited health insurance cover and avoid financial hardships.

3. Limited life insurance cover
Untimely death of the breadwinner in the family, is another leading cause of bankruptcy.

Unlike health insurance, many people do have a life insurance cover. However, like health insurance, this cover is simply not enough. The primary reason for this is because people buy insurance policy for tax saving or investment (such as endowment or moneyback policies). They rarely buy insurance policy for life cover.

Term insurance is the simplest and the cheapest way to buy a LARGE life insurance cover, which will provide sufficient and ample financial support to the family.

How to avoid empty pockets and bankruptcy, is in your able hands and minds.

4. Excessive burden of debt
Easily availability of loan finance is both a boon and a curse. 

On one hand, it helps us to quickly realize our needs and desires. Without a home loan, it would be almost impossible to own a house. Without an education loan, it may be difficult to provide better education to our kids.

But, on the other hand, it can lead to immense financial stress if not managed well. Taking loan for foreign vacation trips, expensive gadgets and consumer durables, fancy homes, luxury cars, etc. can prove to be financially damaging.

Here, the prudent approach would be to (a) use loan finance for critical and important needs ONLY and (b) ensure that the total EMI payouts DO NOT consume more than half of your take-home pay.

5. Nil or insufficient savings
Many people live from salary to salary. The income, that comes at the beginning of the month, is often exhausted in expenses by the end of the month. End result: Zero or almost zero savings.

As a result, no money is left for future requirements or contingencies. End result: Financial difficulties. Without sufficient savings, financial doom is certain.

You can’t simply overspend and hope to lead a comfortable financial life.

To avoid this problem, the recommended strategy is to shift your focus from ‘Income – Expenses = Savings’ to ‘Income – Savings = Expenses’. In other words, Savings should be the first priority. And then, one must learn to manage within the balance money left.

6. Job loss
The trend of job layoffs and retrenchments is becoming quite common in India. Tragically, we are grossly under-prepared for such a calamity.

One is the psychological damage. There is still an immense stigma attached if one is forced to quit one’s job. It is devastating to one's self-esteem too. This problem can probably be resolved through support from family and friends.

The other is financial damage. This can be managed with a suitable Emergency Corpus. At least 3-6 months of your monthly expenses should be kept aside in a Bank Fixed Deposit. This gives you the all-important breathing space. Instead of worrying about how to pay your bills, you can focus on getting a new job.

7. Unforeseen disasters
Natural calamities, terrorist attacks, accidents etc. too rate among the top reasons leading to financial difficulties and bankruptcies.

There is no protection against such unfortunate and unpredictable events. It is all a matter of luck. But, we can at least be prepared to manage the consequent financial damage.

Here, financial planning would prove to be immensely beneficial. This is one aspect that can no longer be ignored or taken lightly.

Right investments, right insurance, right expenses, right monthly budget, right credit cards, right loans, etc. all put together form the basis of a strong and stable financial system. It is this financial strength that will come to our rescue in difficult times. 

In fact, not only the unforeseen calamities but even the typical problems discussed earlier, can be adequately handled with sound financial planning.

In a nutshell: As you can see, some simple and obvious steps are all that is required to avoid the serious problem of bankruptcy.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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