What Causes Bankruptcy?

What Causes Bankruptcy?

Written by Caitlin Wood
Last Updated November 9, 2015

While bankruptcy can help you get out of a seriously bad financial situation, it isn’t cheap and it will ruin your credit for up to 7 years. These two consequences are the main reasons why the average Canadian wants to avoid filing for bankruptcy. And we don’t blame them, bankruptcy should only be considered after all other solutions have been exhausted.  So this begs the questions, what causes bankruptcy and how do you avoid it?

We firmly believe that to avoid bankruptcy you need to know what some of the common causes are, this way you’ll know what kind of financial behaviour you need to avoid. Obviously some causes of bankruptcy are outside your control, when this happens it could potentially be a good idea for you to file for bankruptcy. But there are lots of reasons to file for bankruptcy that can be avoided if you properly and responsibly manage your finances. Keep in mind that for most people, filing for bankruptcy isn’t the result of one issue but rather a build-up of several issues.

Mismanagement and Poor Spending Habits

Mismanaging your finances and irresponsibly spending your money can lead to serious financial issues, including bankruptcy. While this is true, typically it’s not the only contributing factor. Yes living above you means, over spending and failing to create a budget could lead to bankruptcy but is usually takes something more to create a financial situation so bad that bankruptcy is your only option.

What we want you to understand is that poor money skills and serious credit card debt because of over spending are two of the major warning signs that a severe financial disaster could be in your future. Money and debt problems have to start somewhere and that place can usually be found within the resent financial history of the person who wants to file for bankruptcy.

Personal Disasters

Unfortunately sometimes life happens and while we try our best to be prepared we can’t predict the future. It’s these life events that can push someone with poor money management over the edge into bankruptcy territory. Natural disasters, major illnesses and accidents all have the potential to financial ruin you, it’s not something we like to think about but it’s the truth and it’s something we all need to start being better prepared for.

Making sure you’re properly insured and have at least the start of an emergency fund are two of the best steps you can take to protect yourself from serious financial disaster. But even those who are prepared could still find themselves in the position where bankruptcy is the only option available to them.

Aside from illness or a serious accident, divorce is another personal disaster that could force you into a position where bankruptcy is your only option. Divorce, especially if it’s not amicable can be extremely expensive. The separation of assets can and will put a lot of financial strain on both parties, if you and your spouse are currently thinking about getting a divorce this is something you need to take into consideration and prepare yourselves for. (Click here for more information on how to protect your finances during a divorce.)

Job Loss or Income Reduction

Job loss and income reduction seem to be more and more common these days and since these two events often happen with no warning they can lead to bankruptcy. Job loss is definitely a situation that is unique to whoever is losing their job, this makes it hard to say exactly why it happens or how it can be prevented and sometimes there is nothing you can do. Only you know how to improve your productivity or increase your chances of keeping your job.

Preventing Bankruptcy

As you can see preventing bankruptcy can be extremely difficult if not completely impossible. But there are other steps you and take and other options to choose from should you find yourself in dire financial trouble.

  • Debt Consolidation Loans. You’ll obtain a loan with a lower interest rate to consolidate all your debt into on easier to manage payment.
  • Debt Management Programs. You’ll work with a credit counsellor to will help you pay off your debts and teach you how to better management your finances.
  • Debt Settlement. You’ll work with a credit counsellor who will contact your creditors and help you negotiate a reduction.
  • Credit Rehab Savings Program. You’ll work to improve your credit so you can have more financial options.

Just remember that while bankruptcy may be the only option for some people more often than not there is a better and less extreme option out there for you. Do your research and find out what you can do to help yourself prevent bankruptcy.


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Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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