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The Leading Cause Of Personal Bankruptcy…You May Be Surprised!

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:

Stay healthy.
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.

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12 Responses

fathersez | March 9th, 2008 at 7:54 am

I don’t normally read this blog, but the recommendation by Brip Blap was too compelling. I am glad I came over.

This fact is really sad to learn about. As you said, not completely avoidable.

Anyway, are medical costs being carried away to unrealistic levels by the so called “free market mechanism” of the US?

Is there a need to review this free market thinking?

Dana | March 9th, 2008 at 4:02 pm

What’s even scarier are the folks who don’t have insurance at all, who as a result can only go to the doctor if there is something wrong with them (which is an option even for low-income people if there are charity clinics in your town), and who as a result have worse health by the time they go to the doctor than they would have if they’d had the insurance. I would a thousand times rather go bankrupt than die of a treatable cancer. I suspect the reason so many folks who go bankrupt over medical issues are counted as having had insurance during some or all of their illnesses is that the ones who didn’t have it are now dead.

bouncing betty | March 10th, 2008 at 1:12 pm

Having gone through bankruptcy I can tell you one factor in me filing was a lot of out of pocket medical expenses I had to pay. I had a health insurance policy with a high deductible ($5,000) and I had to pay a lot out before it kicked in. That did not help my finances which were shaky at the time.

little-red-hen | March 10th, 2008 at 3:41 pm

Very well written piece. Kudos. I’m a victim of the whole health care financial fiasco you speak of. Not many people realize that even moderate health issues can cost you so much money that you’ll ruin your credit (especially if the health issues leave you unable to work for any length of time). I read your piece via the Prosper blog. I’m on there now trying to recover after some long years of health battles. To respond to the commenter who noted that low income people can visit charity clinics, that is only partially true. The charity clinics in my state will only see a person (after they’ve proved they’re truly poor) when there is something WRONG. They do not offer any checkups, nor minor services here. They also will only offer LIMITED tests for health issues. IF you need more they shrug their shoulders and say, “that’s all our budget permits – you’ll have to see a regular doctor’s office for more.” At this point of course, the poor person shrugs their shoulders back and says, “if I could afford a doctor, why would I have come to this clinic?” It’s complicated and wrapped in layers of red tape – but the fact remains that if you have no money for health care, there is almost nothing available to help. I know, I’ve lived it.

kw1954 | March 10th, 2008 at 6:11 pm

As a Allied Health semi-professional student for the past 15 month, I can see how this happens, though I don’t agree with it (the high costs). The devil in the details largely depends on “primary” symptoms, causes being properly diagnosed, BUT also realizing the likelihood of the secondary requirements ahead of time, anticipating needs and greater detail in family tree relationships to illness, disease. The efforts are there to do this, but often its as hard to diagnose or anticipate this when the family history is cloudy.

asithi | March 11th, 2008 at 10:14 am

Since watching Sicko, I am more than a little worry about health insurance. My husband and I are covered under my plan at work. But if something happens to me and I cannot work for an extended period, say disability, then we will not get coverage by my employer anymore. And if that is the case, there is no way we can go get an individual plan due to pre-existing conditions. The whole thing is twisted. The insurance company is making so much money, but when the people really need the coverage, they don’t want to pay out.

I was in Mexico recently for a vacation. They had a pharmacy at the airport. All these Americans were there shopping for prescription drugs at a 1/3 of the cost here. This one guy was clutching 8 bottles to his chest and telling his friends that he always up on this meds during his annual trip to Mexico because you cannot find these prices in the US.

kw1954 | March 11th, 2008 at 2:38 pm

Great points all and asithi, I had a delimma like that affected me back in mid 90′s that allowed my expenses to soar and it took a while to climb back out. Also coverages went up in Costs, the minute consumers had gains, like government raises, economy improvement, yet the actual progress in medicine suggested it should be LOWER!!

How do I know? How come Canada was able to offer LOWER costing medicine for years, and ONLY when the U. S. saw a slide in gains in that area, did they finally jump on the band wagon. Didn’t take long though to move the market right back up. Typical of our health care system. The providers demands are being met, constantly, but the consumer is left behind.

ChrisFS | March 20th, 2008 at 7:05 pm

That medical costs are the leading cause of bankruptcy is no surprise to me, I quoted that fact often when trolls used to abuse people with poor credit in the old forums. The US is the ONLY industrialized Western country that does not have some form of national health coverage that covers practically all of it’s citizens. Not just Great Britain and Canada, but also industrial powerhouses like Germany and Japan. In the US, the federal government pays more per person than practically any nation for the 25% covered by Medicare or Medicaid (which all of us pay through taxes) and then individuals pay one of the highest per person amounts for private insurance as well. And the health care market in the US is not a free market.

debt help | April 21st, 2008 at 9:23 am

I’ve read a couple of posts like this recently. I guess that’s what happens when you have to fork out for hospital treatment & you have not arranged sufficient insurance. We can all fall ill at any time so it goes without saying, you need to cover yourself – just as you do your home, car…etc.

Cathy | September 30th, 2008 at 7:26 pm

Interesting….not one reference, where did you get your numbers? I can’t find anything to back them up?


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