Because of the high cost of bankruptcy (ruining your credit rating for seven years), most Canadians want to avoid filing for bankruptcy. Avoiding bankruptcy is best accomplished when you understand the reasons why most people file for it in the first place. Some causes are of course outside of your control, while in other cases it is possible to avoid the situation or find a different debt relief option. Looking at the list below, it is important to note that a single one of these causes is usually not enough to force someone into bankruptcy. Usually, it will take several of these situations happening all together which forces someone into bankruptcy.
Poor Budgeting and Spending Habits
Many people believe that an individual’s failure to budget and spend wisely is the only reason why he or she would ever have to consider a debt solution such as debt settlement or bankruptcy. As you might expect, living above one’s means is a contributing factor in many bankruptcies. However, not everyone who goes through periods of spending more than they earn will end up in bankruptcy. Normally, it takes a personal disaster to push those who manage their finances poorly over the edge into bankruptcy.
In any case, even if poor budgeting and spending habits do not lead finally to bankruptcy in your case, there is always the possibility that you will be forced into another debt solution such as debt consolidation or credit counselling. Making a budget and sticking to it will help you avoid many financial problems.
Personal Disasters
Though we do our best, we cannot plan for everything that might come our way in life. So-called “acts of God” such as natural disasters and major illnesses can put even the most diligent saver into a position where he or she qualifies for bankruptcy because of the massive costs associated with such events. Good insurance and saving habits can reduce the chances of these things happening, but they do not take all the financial risk out of life. It should also be noted that although Canadians are covered by the government’s healthcare system, seeking treatment outside this system can be costly. Charges for private medical care often push people into bankruptcy.
Separation and divorce are other types of personal disasters that might put you in a position where the only assets you can keep are those that are exempt from bankruptcy. The separation of assets can put a great financial strain on both spouses, easily seen in the fact that over 10 percent of those who file for bankruptcy in Canada report that their divorce or separation was the main contributing factor to their financial problems.
Income Loss or Reduction
Finally, the loss of income or a severe reduction in what you earn from your job can push you over the edge into bankruptcy. This can happen through the loss of employment, a salary reduction, or any other work-related difficulty. You can reduce the chances of this happening—or at least improve your chances of getting a new job if an income loss or reduction occurs—if you keep up your skills and learn how to fill new roles for your employer.
Preventing Bankruptcy Before It Starts
Bankruptcy harms your credit more than any other debt relief solution and may even affect your job prospects if a future potential employer happens to find out that you filed for bankruptcy. If you are in financial trouble now and seem to be on your way to bankruptcy, don’t wait until bankruptcy is your only option. Fill out the debt relief application for more information on debt relief plans that can help you avoid bankruptcy.