Many Canadians struggle with debt for longer than they need to because of the fear that declaring personal bankruptcy could tarnish their image. However, there are numerous challenges that cause another 120,000+ Canadians to file for bankruptcy annually. You’re not alone.
Knowing the typical causes of bankruptcy can help you detect financial problems promptly and seek professional assistance before debts overwhelm you. The leading causes include:
- Reduced earnings
Your ability to make payments can be affected by losing a job, getting a salary cutback due to fewer working hours, or any other kind of situation that causes your household income to reduce. This may force you to increase your credit card debt in an effort to keep up with bills and other payments.
When your earnings reduce, you should take measures to reduce your spending. Ideally, you should always save a portion of your earnings because an emergency fund can buy you some time to reorganise your finances.
- Medical problems
Although the government helps to take some pressure off medical bills, a serious injury, major illness, or other debilitating health problem, they can both reduce your ability to earn a living and raise your expenses. Health care and insurance typically supplements just a fraction of medical expenses. And without additional insurance benefits, taking time off work to recover can mean increased dependence on your credit card to settle the medical expenses and your day to day expenses.
Even if you qualify for disability income, the amount may not be sufficient to settle your debts. Responding to such emergencies can lead you into financial problems. It is best to prepare for emergencies by having adequate savings.
- Divorce or separation
Statistics show that about 30 percent of people filing for personal bankruptcy in the country are either divorced or separated at the time of filing. For half of this number, marital breakdown is the primary cause of bankruptcy. This situation is similar to having reduced income, only that the costs have increased. Bills that were previously paid as a household now have to be paid by one of the partners individually – rent, phone bills, utility bills – as well as legal costs.
- Emergency situations
Sudden disasters that require a huge financial input, such as a major home or auto repair, can also lead to bankruptcy.
- Financial mismanagement
Any of the above situations can cause you to rely heavily on your credit card. This is perhaps why overspending on your credit card is the leading cause of bankruptcy in Canada. People usually rely on their credit cards when they don’t have enough savings to address emergencies. It is important that you budget to monitor your income, expenditure, and savings.
Bankruptcy or debt counselling can help you understand the benefits of declaring bankruptcy, as well as any alternatives, such as a proposal, and their implications on your future financial situation.