Five Main Reasons for Bankruptcy and How to Avoid Them

Bankruptcy - Business Person holding an empty wallet

Personal bankruptcy in the United States is governed by federal law. The most common type of personal bankruptcy is Chapter 7 bankruptcy, which involves liquidating assets to pay off creditors. Chapter 13 bankruptcy, on the other hand, allows individuals to reorganize their debts and repay them over time.

Bankruptcy can be a difficult decision to make, but most Americans don’t get a chance. About 240,000 people file for bankruptcy every year in California alone. Many more are at risk for it. If you want to avoid bankruptcy, you need to know the reasons behind it. Moreover, you also need ways to prevent these tremendous financial setbacks.

woman calculate how much cost or spending have with credit cards

Medical Bills

Medical bills are one of the prime reasons people file for bankruptcy in the United States. A recent study conducted by the American Association of Retired Persons (AARP) found that 62% of all bankruptcies resulted from medical expenses. This is particularly true for individuals between the ages of 45 and 54.

The high cost of healthcare is one of the main reasons many people struggle financially. The average price of a family health insurance policy rose by 5% in 2018 to nearly $20,000 per year. And deductibles have also increased by about 67% over the past decade.

This means that even if you have health insurance, you could be on the hook for tens of thousands of dollars in medical bills if you or a family member gets sick. This is problematic for any individual as usually, they have other debts that they need to pay.

Student Debt

Student debt is another significant factor that is forcing many people into bankruptcy. The cost of college has been rising steadily for years, and there’s no end in sight. In the 2017-2018 school year, the average cost of tuition and fees at a private four-year college was $34,740.

This is a significant amount of money and one that many professionals can’t bounce back from during the first year of their amateur careers. Moreover, the interest and penalty rates are known to pile up quickly, which only exacerbates the problem.

The monthly student loan payments can be higher than their mortgage or rent for many individuals. This is a significant financial burden and one that often leads to default.

Credit Cards

Credit cards are also a significant factor in personal bankruptcies. They are among the most common debts that people file for bankruptcy to discharge. The average household with credit card debt owes about $16,000.

This is a significant amount of money and can be challenging to pay off. Credit card companies often charge high-interest rates, making it nearly impossible to get out of debt.

Moreover, many Americans use their credit cards to live beyond their means. This can lead to a vicious cycle of debt that is difficult to break free from.


Another common reason for personal bankruptcy is separation or divorce. This is particularly true for individuals who have a lot of debt in their name.

When you get divorced, you are responsible for your debts. This can be a significant financial burden, especially if you have joint debts with your ex-partner. Moreover, you may also be responsible for alimony or child support payments, which can further strain your finances. Getting a good divorce lawyer can help you settle for more feasible alimony. Moreover, they might be able to stop your divorce altogether.

Poor Financial Planning

Lastly, poor financial planning is another common reason people file for bankruptcy. This is particularly true for individuals who don’t have an emergency fund.

An emergency fund is a crucial part of any financial plan. It helps cover unexpected costs, such as medical bills or car repairs. Without an emergency fund, you may rely on credit cards or loans to cover these costs. This can lead to a cycle of debt that is difficult to break free from.

Ways to Avoid These Reasons for Bankruptcy

Avoiding these reasons for bankruptcy should be your main priority. Here are simple ways you can avoid them:

  • Build an emergency fund: This will help you cover unexpected costs without going into debt.
  • Make a budget: This will help you keep track of your spending and make sure you’re not spending more than you can afford.
  • Invest in yourself: Education and training can help you earn more money and be better equipped to handle financial challenges.
  • Get help: If you’re struggling with debt, don’t be afraid to seek professional help. A financial advisor can assist you in developing a plan to get out of debt.
  • Stay disciplined: It’s important to be disciplined when it comes to your finances. This means sticking to your budget, avoiding unnecessary purchases, and making payments on time.

The five main reasons for bankruptcy are debt, credit cards, separation, poor financial planning, and medical bills. Bankruptcy can be a difficult process to go through, and it’s important to avoid it if at all possible.

There are a few ways you can avoid bankruptcy, such as building an emergency fund, making a budget, getting help from a financial advisor, and being disciplined with your finances. Follow these tips, and you should be financially capable of avoiding bankruptcy.

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