JOEL - Bad things happen to all people. It is hard to understand, however, why God would allow terrible things to happen to innocent people who are basically good and faithful. Sometimes people are afraid that they have done something wrong and that God is punishing them for it. The scriptures report of times when God has inflicted hardships on people because of their disobedience(Gen. 6:5-7; Lev. 18:24-30). But that was usually on a grander scale and it was mostly done to get peoples' attention. For most people and most situations God does not allow bad things to happen just to punish us for something we did wrong. He knows that the natural consequences for most of our sins will be punishment enough. True punishment for our sins would happen in the next life if we don't repent.
Many times bad things happen simply as a consequence of our careless actions. You touch a hot coal, you burn your finger; you run out into the street, you get hit by a car, etc.. It's when things go wrong without us having done anything to deserve it that is hard to understand.
The answers lie in the reasons why we are here and what we brought with us from the spirit world. In our pre-earth life we all agreed to follow our Heavenly Father's plan. We loved Him and wanted to eventually become like Him. Jesus himself has told us to "Be ye therefore perfect, even as your Father in heaven is perfect."(Mat. 5:48). In order to do that we needed to come to earth to accomplish three basic things that would make it possible to become like him:

1. God has a body of flesh and bone. We were only personages of spirit. Therefore, we needed to obtain a body of flesh and bone. For this all we needed to do was be born.
2. God is perfect and exalted. Now that we have imperfect bodies with all the accompanying appetites, desires, and weaknesses, we could not return to him and stand in the presence of his glory unless we learn to overcome these things. Therefore, we need to come here to be tried and tested, to prove ourselves worthy to return to His presence. Our love, faith and obedience to God are measured.
3. God knows all things and has experienced all things both good and bad. Therefore, we need to gain knowledge and have experiences as well here on earth. Experiences that are both good and bad. The apostle Paul preached that, "we must through much tribulation enter into the kingdom of God"(Acts 14:22).

Something we brought with us though from our pre-earth life was free agency. God would never force anyone to obey his commandments. That was Satan's plan. God has given all men their free agency so that they can choose for themselves to do right or wrong. Bad things happen to good people when someone chooses to do something wrong that is harmful to others. God allows this to happen so that the actions of that person and the victim of the action can stand as witnesses against the perpetrator. God will then be able to pass righteous judgment on the unrepentant sinner and his punishment will be justified:

"And when Amulek saw the pains of the women and children who were consuming in the fire, he also was pained; and he said unto Alma: How can we witness this awful scene? Therefore let us stretch forth our hands, and exercise the power of God which is in us, and save them from the flames.
But Alma said unto him: The Spirit constraineth me that I must not stretch forth mine hand; for behold the Lord receiveth them up unto himself, in glory; and he doth suffer that they may do this thing, or that the people may do this thing unto them, according to the hardness of their hearts, that the judgments which he shall exercise upon them in his wrath may be just; and the blood of the innocent shall stand as a witness against them, yea, and cry mightily against them at the last day." (Alma 14:10-11)

For the victim, this is where some of the testing comes in. Even though he is suffering if he keeps his faith in God, he will be blessed for his suffering and can be exalted in heaven(D&C 58:2-4). As God told the prophet Joseph Smith during his persecutions, "all these things shall give thee experience and shall be for thy good."(D & C 122:5-7). God also reminded him how even Jesus had to suffer while here on earth, "The Son of man hath descended below them all. Art thou greater than he?"(D&C 122:8)
What about the bad things that are not always caused by another person, such as accidents, sickness, or acts of nature? There is opposition in all things. This has always existed. Life would be pretty boring if it did not. In order for us to truly appreciated and recognize the good things in life we need to experience some of the bad. Also, hardships help make us more humble (Alma 32:12-16) and more sympathetic to others who may suffer the same things. Here is another chance for God to test us and for us to prove ourselves worthy. God allows people to suffer to see if we will express our compassion and help that person or if we will "pass by on the other side" as recorded in the story of the good Samaritan(Luke 10:30-37).
We were not put on this earth alone. Part of our test here is to see if we truly love our fellow man and will express that love by giving service and help when needed.
"And his disciples asked him, saying, Master, who did sin, this man, or his parents, that he was born blind? Jesus answered, ,neither hath this man sinned, nor his parents: but that the works of God should be made manifest in him." (John 9:2-3)
This of course will require that someone be in need. We will all have the opportunity to experience both sides of these tests. Sometimes we are the victim and we must swallow our pride and accept help. Sometimes we are the one who helps the victim. Both are needed to carry out God's plan to have us come back to Him.
Our earthly trials can reveal talents and gifts that God has given men and women. The development of these talents helps us progress and to serve other people (2 Ne. 2:11; Alma 62:41; D&C 122:1-9). Trials can generate and perfect attributes of godliness, such as patience, empathy, sacrifice, and compassion.
Of course, God has not left us alone without anything to help us survive this life. He has given us prophets to guide us, brothers and sisters to help us, scriptures that tell us what to do, and the Holy Ghost to inspire us and help us make correct decisions. And the harder things get the more we appreciate those things. Harold B. Lee said, "Just as a flood-lighted temple is more beautiful in a severe storm or in a heavy fog, so the gospel of Jesus Christ is more glorious in times of inward storm and of personal sorrow and tormenting conflict. When the density of the fog of doubt and uncertainty and dangers in the way ahead put fear into our hearts, God's eternal light of gospel truth is more beautiful than ever before because of our greater need." (Conference Report, April 1965, p. 16)
There isn't anything inherently cleansing in pain itself. Suffering can wound and embitter and darken a soul as surely as it can purify and refine and enlighten. It is ultimately up to us how we choose to respond to the challenges and hardships that will come our way. A positive response requires a lot of faith on our part to keep going and to not feel as though this life is all for nothing. Instead of asking, "Why am I suffering?" we should ask, "What does the Lord want me do in this situation?" This positive attitude and example of endurance can also be a great influence and help to others as well.
We can derive great strength and comfort from the teachings and example of Jesus Christ, and the promise that God will never test us beyond our ability to withstand (1 Cor. 10:13). However, there are still times when the pain and suffering seem almost too hard to bear and we can not see how it could be possible to continue on. We lose a loved one, we suffer a divorce, we lose a job, someone betrays us, or we suffer from some terrible disease or accident. We must remember the bigger picture; that this life is but for a small moment in the eternal scheme of things. The Lord told Joseph Smith, "My son, peace be unto thy soul; thine adversity and thine afflictions shall be but a small moment; And then if thou endure it well, God shall exhalt thee on high; thou shalt triumph over all thy foes"(D&C 121:7-8).
If we can learn to find a little joy along the way and hold on to and cherish those moments of joy, they can help us endure to the end. If we can occasionally stop worrying about our own problems and lose ourselves in the service of others, we will not have time to dwell on our own difficulties and become depressed by them. By Involving ourselves in other peoples lives we may actually find solutions to our own problems.
We will probably never be able to fully explain the reason for every bad thing that happens to us in this life. As the Proverbs tells us, "Trust in the Lord with all thine heart; and lean not unto thine own understanding. In all thy ways acknowledge Him and He shall direct thy paths(Pro. 3:5-6).
Finally, God does not want us to despair and give up. We must always remember that He loves us and wants us to be happy and come back to him (Heb. 12:6). And we will do that if we live His gospel, remain faithful, and endure to the end.(D&C 58:2)