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The Most Common Reason Americans File for Bankruptcy

Maurie Backman, The Motley Fool

It’s not just a matter of too much shopping or excessively high mortgage or car payments. Often, Americans are forced into bankruptcy due to one key factor they can’t control.

The word bankruptcy spelled out in tiles on a pad of paper

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Americans aren't always great at managing their money. You'll often hear stories of folks landing deep in debt because they consistently spend more than they earn and fail to differentiate between needs and wants.

But medical debt is the number one source of personal bankruptcy filings in America.

Two-thirds of bankruptcies are caused by medical issues

An estimated 66.5% of all bankruptcies are tied to medical issues, followed by unaffordable mortgages (45%) and spending or living beyond one’s means (44.4%). Having insurance doesn’t always prevent you from racking up tons of health-related bills. You might still struggle to pay them after the fact.

However, you can take steps to lower your medical expenses and save appropriately so you can pay healthcare bills when they’re more expensive than you expected.

Boost your savings to cover costs

The more cash reserves you have, the easier it is to tackle unavoidable medical bills. To this end, it pays to have a robust emergency fund -- one with enough money to cover three to six months’ worth of living expenses.

If you have a medical condition that not only results in high bills but also could impede your ability to work, you may want to aim even higher and have up to a year’s worth of living costs in the bank. That way you won’t have to charge your medical bills on a credit card or take out loans to cover them.

Lower your healthcare expenses

Although some medical bills are unavoidable, there are steps you can take to keep your bills as low as possible.

First, make sure you fully understand your health benefits. Sticking with in-network providers and obtaining the proper referrals and pre-authorizations could spell the difference between having key services covered or having your claims denied.

Second, consider shopping around for better insurance if yours doesn’t offer the coverage you need. A slightly higher annual premium might get you lower copays and deductibles and a wider range of covered care.

Don’t rush to charge medical expenses on a credit card

When you’re faced with a medical bill you can’t pay immediately, your first inclination might be to charge it on a credit card and pay it off over time. But doing so risks damaging your credit score and accruing loads of interest.

A better bet is to work with your providers directly to pay your medical bills over time. Many medical offices will give you some leeway if you can’t afford your treatment outright. Don’t hesitate to ask about affordable payment plans.

Let your providers know when your health insurance company won’t be paying for your services, too. Some medical offices offer reduced rates for patients paying out of pocket, so it always pays to speak up and see if you can negotiate a lower price.

What if I already have medical debt?

Padding your savings and being savvy about costs will help you avoid accruing medical debt. But if you’re already in debt, you’ll have to take some additional steps.

The first thing you should do is negotiate with your providers. You can do this on your own or with the help of a debt settlement company -- or even a lawyer. See if you can work out a reasonable repayment plan.

If you can’t, you may have no choice but to file for bankruptcy. A bankruptcy will stay on your record for many years, making borrowing difficult. But if you can’t pay your medical bills, it may be the best solution.

There are two types of bankruptcy -- Chapter 7 and Chapter 11. Chapter 7 is a liquidation, so your assets are sold off to pay your creditors. Chapter 11 is a reorganization of your debts. This might allow you to retain more of your assets while tackling the problem at hand. It’s easier to qualify for Chapter 11 because it doesn't require you to pass the means test. It also has the benefit of staying on your credit record for less time.

Unfortunately, credit reports don’t distinguish between bankruptcies caused by overspending and those brought on by medical debt, even though the latter is often out of people's control. That's why it pays to negotiate a settlement or repayment plan before going the bankruptcy route.

Medical issues are often unavoidable, but you don’t have to land in serious debt because of them. Be smart about boosting your savings to avoid healthcare debt, and be a savvy patient to keep your costs down. If it's too late for that, don't rush into bankruptcy before exploring other options.

Be smart about medical debt, and you can keep it from having a long-lasting effect on your life.

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