Going bankrupt is probably the worst financial thing that can happen to you.
We see stories all the time of famous people who have gone bankrupt because of their mansions, private jets and spending habits.
But, it's not only celebrities that can run into bankruptcy-causing problems. Normal people can easily get into financial difficult.
As long as you pay your debts you should always be okay because it's not paying debt that causes the creditor to go after the borrower. Sometimes that debt is an unpaid mortgage from a bank like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). Other times it might be another form of unpaid loan from something like FlexiGroup Limited (ASX: FXL) or Cash Converters International Ltd (ASX: CCV).
How to avoid bankruptcy
The easiest advice to avoid bankruptcy is: pay all your bills on time and avoid as many forms as debt as possible. Even credit cards can be a bad idea unless you pay the entire balance on time every time. Don't get into too much debt for your house, get a sensible loan which isn't too much of a stretch for your income.
But, sometimes there can be unexpected circumstances that cause people to get into debt. To use a very cliché phrase, you have to expect the unexpected. Your fridge, car, air con unit or anything else may need replacing at any time, so keep a good emergency fund of at least three months of basic living expenses. Maybe up to six months would be a smart idea. At the very least have $1,000 cash sitting in a separate savings account.
A lot of people know to spend less than they earn, but a loss of earnings can be particularly devastating for a household reliant on one main breadwinner. An emergency fund helps here. But your earnings are the most important wealth builder and protector. So you need to make yourself as indispensable as you can at your current role – work hard and be kind to your boss, colleagues and clients. Take additional education to improve yourself, your ability and CV where possible. It can be okay if you lose/leave your current job as long as you can be employed elsewhere.
Foolish takeaway
Australia is one of the most indebted nations in the world. The quicker we can pay down non-mortgage debt the more secure we will be and increase our net worth. There's a reason why many investors look for businesses with a balance sheet that's in a net cash position or has no debt at all – they're much less risky.
