The Most Common Reasons People File for Bankruptcy

Learn the most common causes why people fall into bankruptcy.

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Bankruptcy can be defined as a legal process through which individuals or businesses who cannot repay debts to creditors seek reprieve from some or all of their debts by going through a court proceeding where the court trustee examines both the assets and liabilities of the said individual. In most cases, bankruptcy is imposed by court order, often initiated by the debtor. This process can be quite stressful, as an average individual cannot go through it alone except by working with a bankruptcy attorney.

For individuals or businesses who are going through financial crises, bankruptcy grants them the opportunity to settle down a particular proportion or even settle all of the debt owed over a particular time. Bankruptcy can help business owners start their businesses afresh, but it makes it difficult for them to request a loan in the nearest future. Below are some of the common reasons why people end up filing for bankruptcy.


Unforeseen medical situations are something nobody can ascertain and many patients just find it hard to pay them. Research has shown that medical expenses are actually one of the biggest reasons people file for bankruptcy, taking the amount of work time lost leading to loss of income.

Therefore, medical expenses that are incurred right before filing for bankruptcy are immediately taken care of. It is therefore advisable for those suffering from a substantial amount of medical expenses or who have huge medical bills to settle, to visit a legal expert to file for bankruptcy.


Filing for bankruptcy as a result of losing one's job mostly affects individuals with no company in their name. Losing one's job can make one's savings quickly vanish since there is basically no more monthly salary or wage coming in. 

Despite the usual daily expenses, losing your job also acquires more expenditures, and unfortunately, with the way the job market is present, it might be hard to get new employment in a short time.


Sometimes bankruptcy can be acquired as a result of overspending. In some cases, it could be as a result of inflation i.e., the rise of prices of goods and services in the economy, poor budgeting skills, or the lack of attention to what is needed.

One of the common things people don't take notice of when it comes to overspending is the expenditures of their children. This is most common in influential homes, just because one's parents are in affluence doesn't mean that they can spend extravagantly. 

Therefore, wealthy families should train their children on how and when to spend money to keep the business flourishing. 


Foreclosure can be referred to as a legal process in which a lender attempts to recover a certain amount borrowed on a defaulted loan by taking ownership of or selling the mortgaged property. 

Usually, the lender obtains a security interest from the borrower who pledges his or her assets like a house or company or cars to secure a loan. The foreclosure process as applied to a residential mortgage loan is a bank or another certified creditor selling or repossessing a part of property after the owner has failed to adhere to the agreement made between the lender and the borrower called a 'deed of trust'. 

Inability to pay mortgaged property by a borrower often leads to foreclosure. So, rather than lose one's shelter and take the risk of living on the streets, some people turn to declare bankruptcy. 


Although it is said by people that it is good to save for the rainy day, not everyone can afford to save a large amount of money for unforeseen contingencies. Emergencies can occur at any moment. 

Whether it is a business emergency like incurring losses after a failed investment or a machine in the company going bad or maybe even some untrusted employees running away with company funds, or domestic emergencies like your house suddenly collapsing due to natural disasters or poor maintenance or your car suddenly breaking down. In these cases, even if you have some emergency funds stashed somewhere, emergencies like these can incur huge losses which can later cause bankruptcy. 


When a company is not flourishing, it often leads to cutting costs, which sometimes include cutting from the employee's paychecks. This can be said to be one of the major reasons why some companies let off their staff especially in times of recession in the economy. 

If you then cannot find ways to make up for the lost money, you may have to file for bankruptcy. 


Getting a divorce is not something easy to go through with, from the cost of hiring a divorce lawyer to the emotional stress involved. Divorce is another common reason for filing a divorce, as most people who go through this process end up experiencing financial difficulties. Filing for bankruptcy allows both individuals involved to share the cost of an attorney and some other fees which could eventually protect you from paying any form of joint debt. 

It has been researched that individuals, mostly men file for bankruptcy because they had to pay the alimony for divorcing their spouse. Federal bankruptcy courts are filled with people whose financial problems are caused by a divorce. Dissolving marriages due to these financial pressures may eventually wind one into bankruptcy.


After spending an exorbitant amount of money from a loan in getting a college education, with the belief that you would be able to get a nice and high-paying job immediately after graduation. Unfortunately, things don't really work out that way for some people. Whereas, everyone has to pay back that exorbitant student loan which they used in sponsoring their college degree. Research has shown that about 1% of bankruptcy cases are due to the inability to repay the borrowed loan.   

Before finally filing for bankruptcy, you must have gotten to the worst-case scenario that can ever happen, as many Americans seem to pursue this last-ditch effort to save their finances. But before deciding on declaring bankruptcy, the individual or business involved can still find a way of settling the debt as an alternative to declaring bankruptcy.

A debt settlement can be referred to as a situation in which an individual is given the opportunity to settle your debt at a lesser amount compared to what you owe, with the expectation of paying the amount settled for completely. Some other ways to avoid bankruptcy include: -

  • Selling of your available asset 
  • Spending wisely and considerably
  • Seeking help from family and friends
  • Communicate with your creditor letting them understand your situation.

There are several ways of reaching a settlement, it is mostly done by involving a third-party company or preferably a lawyer who helps in negotiating your debt, in which you have to make payments to the third-party company until they have been able to reach an agreed settlement with the involved creditor.  

Bankruptcy might not always be seen as the best solution to go with. There is absolutely no need to file for bankruptcy over a trivial financial problem, it should not be considered as the first choice of action and also not be seen as a last-ditch solution.   

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