According to Bankrate’s 2019 Financial Security Index Poll, nearly three out of 10 Americans do not have enough emergency funds available to deal with a financial crisis. In the event of a financial crisis, the lack of an emergency fund usually leads to depending on unsecured debt, such as credit cards, installment and payday loans, to help fund daily expenses. When debts mount up to the point where the debtor sees no light at the end of the tunnel bankruptcy is often viewed as a last resort to solve a financial crisis.

Bankruptcy is a legal process where a debtor, which can be an individual or entity, such as a business or municipality, declares bankruptcy to acquire relief from their debt. Bankruptcy is normally accomplished through a discharge of the debt or through a restructuring of the debt. You can file for bankruptcy on your own, or you can enlist a bankruptcy lawyer.

Although there is a stigma attached with filing for bankruptcy, it can happen to anyone. There are numerous reasons for filing for bankruptcy including, unemployment, overuse of credit, marital dissolutions, unexpected losses, and large medical expenses.

A study performed by Harvard University indicates that medical expenses are the number one cause of bankruptcy, accounting for 62% of all personal bankruptcies. Serious illnesses or injuries can easily result in hundreds of thousands of dollars in medical expenses, even with medical insurance, that can rapidly wipe out savings.

Unexpected losses such as the loss of property due to natural disasters such as hurricanes, tornadoes, earthquakes, floods, etc., for which the property owner is not insured or adequately insured, can lead some into bankruptcy. Beyond the loss of property comes the expense of finding a new place to live, replacing clothes and food.

Some people have a difficult time staying within their budget and find themselves spending beyond their means, which can lead to excessive credit card debt, installment and payday loans, as well as other personal loans. This becomes problematic when the borrower becomes overextended and is unable to make the minimum payment.

To help protect yourself from bankruptcy, it is vital to build up an emergency fund, always have adequate medical and property insurance coverage, and avoid the overuse of credit so that your debt-to-credit ratio remains low. If you are unsure, talk to a professional who can help determine if you have enough coverage and are financially prepared.