21 Primary Reasons People Declare Bankruptcy
Bankruptcy often results from a mix of unforeseen circumstances and financial pressures that can overwhelm even the most careful individuals. From medical emergencies and job losses to the impacts of divorce and student loan debt, let’s explore the most common reasons people end up filing for bankruptcy.
Medical Emergencies
The leading cause of bankruptcy in many places is overwhelming medical expenses. High costs for emergency medical care can quickly deplete savings and assets, pushing individuals toward bankruptcy.
Job Loss
Sudden unemployment can drastically change one’s financial stability. Without a steady income, maintaining regular payments for mortgages, car loans, and other monthly expenses becomes challenging. Many lack sufficient emergency savings to cover living costs during periods of joblessness, leading to accumulated debts that spiral into bankruptcy.
Credit Abuse
Easy access to credit cards and loans can lead to excessive debt accumulation beyond one’s ability to repay. High interest rates compound the problem, making it harder to pay down the principal balance. This cycle often ends in bankruptcy as individuals find it impossible to keep up with payments.
Divorce
Divorce or separation can be financially devastating, resulting in the need for individuals to support two households temporarily or permanently. Legal fees and the division of assets further strain finances. This often requires one or both parties to file for bankruptcy due to the inability to meet financial obligations on a single income.
Unexpected Expenses
Sudden, large expenses such as home repairs after natural disasters or unexpected major vehicle repairs can destabilize a previously healthy financial situation. Without adequate savings, these costs can force individuals to rely on credit, leading to high debt levels that are unsustainable. Bankruptcy sometimes becomes the only option when these debts exceed the ability to pay.
Reduced Income
Even if employment is continuous, a reduction in income can lead to bankruptcy. Pay cuts or decreased work hours reduce cash flow, making it difficult to cover previously manageable debts and monthly bills. When expenses exceed income, debt accumulates to unmanageable levels, leading to financial collapse.
Poor Planning
A lack of budgeting and financial planning can lead individuals to spend more than they earn. Without a clear understanding of expenses versus income, it’s easy to accumulate debt. This financial mismanagement often results in a need to file for bankruptcy.
Business Failure
Small business owners face a high risk of bankruptcy when their ventures fail. The financial challenges of maintaining a business, such as inconsistent cash flow, high startup costs, and operational expenses, can overwhelm personal finances.
Foreclosure
Failure to keep up with mortgage payments can lead to foreclosure, which often pushes homeowners to file for bankruptcy as a last resort to stop the process. Bankruptcy can provide a stay against foreclosure, giving homeowners a chance to reorganize their finances.
Student Loans
Student loans can contribute to overall financial strain that can lead to bankruptcy. Graduates often face significant monthly payments that, combined with other living expenses and debts, become unsustainable. Though rarely discharged, filing for bankruptcy may help manage other debts, making student loan payments more manageable.
Utilities
Mounting utility bills can become a substantial financial burden, especially when combined with other financial pressures. In colder climates, heating costs can skyrocket, while in warmer areas, air conditioning can lead to high electricity bills. When these bills are not managed, they can accumulate to the point where bankruptcy seems the only solution.
Addiction
Addiction to gambling, drugs, or alcohol can drain financial resources quickly. The costs associated with addiction can lead to significant debt accumulation, which spirals out of control. Bankruptcy often follows as individuals cannot keep up with their financial obligations while funding their addiction.
Health
Chronic health issues can lead to high medical bills and reduced earning capacity, which, in combination, are a common pathway to bankruptcy. Ongoing health problems may prevent consistent employment, reduce income, and make medical debts even harder to handle.
Bad Insurance
Underinsurance can lead to financial disaster when unexpected events occur. Whether it’s health, home, or auto insurance, not having adequate coverage can leave one exposed to huge out-of-pocket expenses. These expenses often become unmanageable quickly, leading to bankruptcy.
Investment Failures
Bad investments can result in significant financial losses. Whether it’s investing in the stock market, real estate, or speculative ventures, losses can exceed the amounts individuals can afford to absorb. These investment failures are particularly devastating if funded by borrowed money, often leading to bankruptcy.
Tax Liabilities
Owing significant back taxes to the government can lead to aggressive collection actions, including liens, levies, and wage garnishment. The inability to pay tax liabilities, along with penalties and interest, can rapidly become a major financial burden, pushing individuals towards bankruptcy for relief.
Legal Issues
Legal troubles, including lawsuits or the need to defend oneself against legal claims, can lead to enormous legal fees. These fees, combined with any potential settlements or judgments, can financially ruin individuals, making bankruptcy a necessary step.
Predatory Lending
Falling victim to predatory lending practices can trap borrowers in a cycle of high interest rates and unfavorable loan terms that are difficult to escape. These practices often target the most financially vulnerable, leading to spiraling debt that ends in bankruptcy.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) can initially seem affordable but may lead to financial trouble as interest rates adjust upwards. Many homeowners find themselves unable to meet the increased payments, leading to defaults and, ultimately, bankruptcy.
Luxury Items
Spending on luxury items and living beyond one’s means can lead to financial downfall. When individuals finance lifestyles, they cannot afford through credit, the resulting debt can become unmanageable. Bankruptcy often follows as a last attempt to manage escalating financial commitments.
Credit Scams
Victims of credit scams and fraud can find themselves suddenly burdened with unauthorized debts. Fighting these issues can be costly and time-consuming, and sometimes bankruptcy is the only option to escape the financial damage caused by fraudsters.
Josh Dudick
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.