When you hear about people who file bankruptcy, what normally comes to your mind? Is it someone who is a spendthrift, has a zillion credit cards and can’t seem to hold on to a job? Maybe those who live with a lot of vices that have taken over their lives? True, a lot of what leads to grave financial loss is preventable and avoidable: getting in with the wrong crowd, embarking on high risk ventures, taking on expensive hobbies and maybe even addictions… But there are also those events that turn out to be huge surprises, those that catch us off guard and that can possibly threaten our finances.
Do you know what happens to be the #1 reason for bankruptcy? Not divorce, job loss nor business failure. It’s actually ILL HEALTH. It’s a bit unnerving to hear that your failed health can just wipe you out like that, but it’s a gloomy fact. I find it unnerving because it’s something that seems harder to sidestep: a divorce can be worked out amiably or avoided altogether if you don’t get married; job loss isn’t as tricky if you keep your skills up; while business failure won’t happen if you don’t start a business. But with failed health, nobody is immune — it is all too likely to claim us at one point in our lives; after all, we’ll all be old and decrepit one day and we’re all simply delaying the inevitable.
Facts About The Leading Cause Of Bankruptcy
Here are some scary statistics that woke me up: they’re sourced from a Harvard medical study done a few years ago which involved sending out questionnaires to 1,771 bankruptcy filers in 2001 in California, Illinois, Pennsylvania, Tennessee and Texas:
- Expensive illnesses trigger half of personal bankruptcies.
- Majority of people who go bankrupt because of medical reasons actually have insurance! Many start out their illnesses with insurance while 38% lose coverage by the time bankruptcy is filed.
- Medical-caused bankruptcies affect about 2 million Americans each year, including 700,000 children.
- Illness leads to further problems like job loss and loss of insurance coverage.
- Out-of-pocket costs for those who’ve filed for bankruptcy ranged from ~$11,000 to ~$18,000. Now this is ridiculous:
Out-of-pocket medical expenses covering co-payments, deductibles and uncovered health services averaged $13,460 for bankruptcy filers who had private insurance at the onset of illness, compared with $10,893 for those without coverage. Those who initially had private coverage but lost it during their illness faced the highest cost, an average of $18,005.
Wait a sec. Did I read that right? You mean, private coverage is costlier?
And here are some more sobering words from Dr. David Himmelstein, the Harvard study’s lead author and an associate professor of medicine: “Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick.”
Avoid Bankruptcy, Plan Ahead!
Scary thoughts indeed. So if poor health will someday be our fate, what can we do to stave off some of its consequences? I’d like to share my thoughts on how to improve the odds against going bankrupt, no matter what the causes are:
While we still can, we can try to prevent disease as long as we are able. I’m always heartened to hear about 95 year olds who are still sprightly and able to enjoy each day as it comes. Hear out your physician and do what the doctor orders: do regular exercise (at least 3 times a week), eat healthy foods, manage your stress, get enough sleep, get regular physicals, take your vitamins.
Build your emergency funds.
One of the most basic financial moves we can make is to build up our emergency funds. These are cash or liquid funds that we should keep in handy and should be intended for unexpected expenses that come up. I normally have 10%, sometimes up to 20% of our portfolio in liquid accounts for this purpose. A typical cash fund of this sort covers from 3 months to 1 year of living expenses (most common is coverage for 6 months of expenses).
Have the appropriate coverage.
Insurance is one of those things I tend to want to sweep under the rug and never look at again. I hate dealing with insurance claims but it’s clearly a necessary evil. Premiums can be unaffordable so we’re tempted to ditch the coverage; even the stats are against us — why is it that out of pocket expenses are more expensive when you carry private insurance? But do we want to take the risk? Not really! I’m keeping with conventional financial wisdom and making sure I’ve got the following policies in place: life, disability, health, homeowner’s, liability and car insurance. Plus don’t forget that estate plan.
Be prepared and develop a Plan B.
It may be grim and unpleasant, but it could be worth trying to visualize what you’d do if you ever had to encounter the worst case scenario. Doing so forces us to think defensively and to be ready for the unexpected. How about asking ourselves these questions: What do we do if we ever lose our jobs? If we lose our family’s breadwinner? What if we get disabled? These are tough questions to run through, but if we’re able to address these issues, the blow of loss, if it ever comes, is mitigated.
One of my favorite sayings is: make hay while the sun shines. The good life can be way too short so one can never take things for granted.
The Silicon Valley Blogger (SVB for short) is behind the The Digerati Life, a blog that covers personal finance, business, investment and real estate topics along with the occasional Silicon Valley tech story sprinkled in. SVB is a married mother of two young kids who juggles a nine to five job in the IT industry along with raising a family and various entrepreneurial pursuits.