Life Events That Can End in Debt – And How to Avoid the Consequences

January 16, 2014

debtSo many contingencies can be addressed with solid financial planning – having an emergency fund, creating a college fund to put children through school while minimizing student loan debt, building a retirement plan, and even having life insurance to care for your loved ones upon your death.

But sometimes things happen that come from outside the realm of finance. We can think of them as life events, and they can be game changers.

Often we deal with these events by going deeper into debt, especially if the event is long-term in nature. That compounds the problem because we can end up paying for that reliance on credit for many years after the fact.

What kind of events can take place and how can we avoid the debt they often bring?

A Lengthy Period of Unemployment

A job loss can turn into a life event when you’re unable to find a suitable replacement job within a reasonable period of time. The longer it lasts, the more likely you’ll turn to debt in order to maintain your lifestyle.

Here is how to avoid unemployment-related debt:

  • Make a lifetime habit of keeping your most basic living expenses – housing, cars and debt – as low as possible. Cutting variable expenses like groceries and entertainment can be done in a pinch, but big picture expenses aren’t easily reduced.
  • Keep a fat emergency fund – three to six months of living expenses is good, but these days a full year’s worth is much better protection.
  • Assume your unemployment will be long-term and begin reducing your living standard immediately.
  • Find ways to make money immediately, that way you’ll be in circulation and making contacts and have an income source in place when your unemployment benefits run out.
  • Most job losses are preceded by smoke signals – don’t ignore them. That’s your cue to update your resume, renew your network contacts and put out some feelers before anything actually happens.
  • Be realistic about employment prospects in your field. If the job market is tightening, develop new skills that will keep you ahead of the pack, or start making preparations for a career change if a new job in your current field looks unlikely.

Major Medical Events

Though we hope they won’t ever happen to us, the possibility is real that at some point you may be hit by a medical event that’s more than just a bump in the road. Heart troubles or a bout with cancer can last for many months. One of the problems of avoiding debt during such an event is that there are so many variables relating to the severity, length of time and ability to earn an income while you’re going through it.

Complete avoidance of debt during a major medical event may not be possible, but you can minimize it.

  • Have the first two bullet-point recommendations in place at all times – they’re virtually universal in dealing with any life event.
  • See if you can create a limited work-from-home arrangement with your employer, even if it requires reduced responsibility. That will give you some sort of income, which will be critical if you don’t have (or don’t qualify for) disability coverage.
  • It could help to have some type of work-at-home side business in place, in the event that you can’t effectively work outside your home.
  • If you’re falling behind on medical bills early in the process, try to get outside help early. Get help from family, friends and charities for expenses not covered by insurance.
  • Negotiate lower fees from healthcare providers wherever you can. Many will work with you.

Legal Issues

Legal issues can take so many different forms that it’s impossible to generalize. It could be a civil suit that seeks to seize your assets, a regulatory challenge to your business or a criminal charge. When they hit, you may be tempted to tap your credit lines early in an attempt to defend yourself, but that will only compound your troubles.

Ways to avoid the worst and stay out of debt:

  • Keeping expenses low and having a huge emergency fund help here too. Think of it as preparing for the worst.
  • Keep prepaid legal services in force, even when it seems as if you’ll never need them. This will keep your own legal counsel from draining you during the fight.
  • The saying, ‘an ounce of prevention is worth a pound of cure,’ applies here. In all areas of your life, do your best to be a good citizen and to comply with applicable laws. In addition to minimizing your exposure to trouble, a clean track record can be your best defense before a judge. This is especially true if you face criminal charges.
  • Negotiate and settle where you can. Some issues are misunderstandings that can be cured by some heartfelt face-to-face discussions. Swallow your pride and do what you can to minimize the damage.
  • Keep insurance in place to cover any identifiable legal exposure.

Business Failure

What goes up, must come down, and that can apply to businesses too. One of the biggest problems with a business failure is that you’ll probably have poured all of your time, resources, and emotions into your business, making it very difficult to walk away. You might do anything to save it, and that includes borrowing money.

Here are some ways to avoid that fate:

  • Once again, refer to and implement the first two bullet points.
  • Do your best to separate your business from your personal assets using a legal perspective.
  • Don’t risk or pledge personal assets for your business. If your business fails you’ll need your home and your retirement plan more than ever.
  • Keep or develop some employment skills so that you’ll be able to grab a temporary job, either to carry you through a rough spot in your business or to help with the transition to a new one.
  • Know when it’s time to fold up the tent. If the business is in its terminal phase any money you put into it to save it will be a matter of throwing good money after bad. You’ll need all the resources you can muster for your next venture.

It may not be possible to completely avoid going into debt as a result of a major life event. But there are ways to keep it to a minimum and that will give you a better chance at rebuilding your life once the event passes.

Have you been through a life-changing event that impacted your finances? Tell us about it in the comments!

This article was originally published October 23, 2012.


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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5 Responses to Life Events That Can End in Debt – And How to Avoid the Consequences

  • Leslie Tayne, Esq.

    Great examples and solid advice! This is why I like to stress to our clients too that having an emergency fund is so important! You never know what is going to happen, and it is better to save a reserve of money to be able to fund these emergencies rather than charging it to a high interest credit card and putting yourself in debt!

    • Kevin Mercadante

      Hi Leslie–Good point on the emergency fund. I tend to think that 80-90% of most problems would be solved with just this one step. Its also an excellent way to stay out of debt.

  • Marie at FamilyMoneyValues

    I would never consider keeping pre-paid legal services on hand – I think it would be better to up your liability insurance and take other measures to cover the risk instead.

    • Kevin Mercadante

      Hi Marie–It isn’t for everyone. But I think it’s a good move if you have a business and are exposed to lawsuits. A friend of mine who is self-employed has it and it’s helped him on several occasions. I think it has it’s place, especially as a way of being prepared.


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