Individuals, businesses, and firms can sometimes be inflicted with the plague of bankruptcy.
Sometimes bankruptcy can be beyond human control and at other times, are products, actions, and inactions of humans, firms, and businesses.
I would like to remind us that financial management is a skill and requires a high level of professionalism. Mismanagement of funds is the major reason for bankruptcy.
All over the world, businesses fold and not just fold, have a lot of incurred debts they have to clear which they even can't pay off which makes bankruptcy the only option they have left.
For most businesses, to even clear their debts, they go as far as selling off both business and personal properties.
To go bankrupt can be man-made or naturally induced. A naturally induced state of bankruptcy is when some inevitable situations come up that might result in a huge loss of business funds to such an occurrence or situation.
It is important to identify the common causes of bankruptcy, to be able to shield one's business from being affected as much as you can.
According to Wikipedia
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.
Any business or firm that is bankrupt seeks relief from their debt by mostly selling off their property to another management who in turn clears their debts and take over the management of the business.
Most causes of bankruptcy can be avoided, hence the need to outline 5 major causes of bankruptcy.
1. Medical expenditures
Like earlier said, this state of bankruptcy can be inevitable. This is one of the scenarios where bankruptcy cannot be avoided.
Sometimes the management or usually the founder of a firm may have a serious health issue that might eat so deep into his business finance to the extent of resulting in debt.
The sick person might likely use people's funds in his business to attend to his health situation, hoping to repay as quickly as he recovers. But unfortunately, his health might grow worse, which makes it difficult for his creditors to patiently wait for his recovery. This can result in bankruptcy.
A study published in the American Journal of Public Health in 2019 found that 66.5% of bankruptcies in the U.S. were due to medical issues like being unable to pay high bills or due to time lost from work.
2. No good credit report
This occurs when a firm or an individual does not have a previously good credit report.
This usually happens when an individual forms a bad habit of overusing his credit card to the point when a situation arises, he won't have even the minimum amount to clear his debts. He becomes an all-around debtor.
3. No emergency fund
This is another common but major reason behind bankruptcy. Even in business, not Everything earned should be spent or used completely in the business. This is because a situation that requires an emergency can easily be attended if there are available funds for that.
It is therefore important to have a personal or business emergency fund. This fund attends to your needs when the situation becomes tough.
Bankrate's 2019 Financial Security Index Poll, says that nearly three out of 10 Americans do not have emergency savings on hand to help cushion a job loss or other financial crisis.
To shield yourself from bankruptcy, you need to cultivate the habit of keeping emergency funds.
4. Lack of good finance structure
Not having a good knowledge of financial structure and nature can make one prone to bankruptcy. Same as having good financial knowledge that keeps you immune to bankruptcy.
A good understanding of the financial structure should teach you to have a good financial backup, as anything can happen in the shortest time such as; accident, loss of properties may occur through collapse, etc.
As much as possible, employ professional planners to help you safeguard your finance and give you good investment ideas that can help multiply your finance.
5. Lack of insurance
Insurance can be the best and last resort instead of bankruptcy.
This is because the future is unpredictable and to shield oneself from all the surprises that might come with the future, enroll in insurance programs for your business properties such as finance, building, cars, as well as medical insurance.
Insurance is a very effective way to clear and avoid unnecessary debts.
Closing Thought
Financial planning is a necessary means to avoid future financial shocks. Have a good record of your expenses, and cut down on the use of credit cards. Have a reputable credit report as this will help in sorting out future financial issues.
This is explicit. Bankruptcy happens now and then. The place of insurance in today consideration as saving for the rainy days is quite questionable. Insurance companies are finding it hard to pay their looming customers their premium. However, ensuring your wealth and property is a good way to escape bankruptcy.
I feel that one way that people become bankrupt is through lavish spending.