5 Common Reasons People Go Bankrupt and How to Avoid Them

reasons people bankrupt

5 Common Reasons People Go Bankrupt and How to Avoid Them

Bankruptcy does not just happen when a person loses all of their assets. It is a specific legal process through which a person declares that they cannot pay back their outstanding debts. It is not about the current amount of money you have; instead, it is about how much you owe o various creditors. 

Chapter 7 and Chapter 13 Bankruptcy are the two most common types of bankruptcy filings. Very basically, filing for Chapter 7 bankruptcy leads to a process in which you sell off your assets to pay back your creditors. In contrast, Chapter 13 bankruptcy allows you to keep your assets and pay off your debts over a specified period. While Chapter 13 bankruptcy might make sense immediately, missing even one payment could negate the whole deal, putting you back at square one. 

This article from David Offen, a noted Philadelphia bankruptcy lawyer, will help explore some common causes of bankruptcy and ways to help you manage your debt and avoid filing.

5 Common Reasons People Go Into Bankruptcy

It is important to remember that declaring bankruptcy should not be a mark of shame. Everyone’s situation is different. Many of the most common reasons that people go bankrupt are due to unexpected or unavoidable circumstances. 

1. Medical Expenses Can Cause Bankruptcy

Medical expenses are the number one reason that average Americans go bankrupt. No one plans on going to the emergency room, but the high cost of health care is still a reality that most Americans must contend with. Beyond the debt incurred when paying medical bills, you must also consider lost wages from not working, and after-care once discharged from the hospital

Editor’s Note: We have several articles that explain how to obtain health insurance if you are between jobs, undocumented, or even homeless

2. Job Loss

With the COVID-19 pandemic, many people had to reckon with a new reality of unemployment. The company you work for could going through their own financial struggles that unfortunately lead to losing your job. Without this valuable income, other debts and bills continue to grow, leaving you in a potentially dangerous financial situation.

3. Separation or End of Marriage

Money can be a significant point of contention during marriage and could even cause problems when a marriage ends. One party may be required to pay child support or alimony to the other party, while the division of assets could leave a former spouse without a home. Beyond that, legal fees and expenses incurred during a separation add to this expected debt.

4. Credit Carelessness

You should never take your money for granted. It can be easy to rack up credit card debt because you never see the money being spent. As long as the card is accepted, you can use it however you like. Using a credit card wildly leads to a higher bill at the end of the month.

5. Surprise Emergencies

Personal disasters happen every day. An intense rainstorm could flood your basement and bring a tree through your roof. Somebody else’s bad day could lead to a car crash at your expense. Emergencies pop up all the time that we cannot prepare for, and the costs associated with these emergencies can run up your debt.

How to Avoid Going Bankrupt 

There is no ONE solution to avoiding bankruptcy, especially in these common cases. The easiest way to “avoid” medical expenses is to not go to the doctor, but that is an unwise and nearly impossible decision. You can work hard to have job security, but if your company goes through a significant downsizing, you can still lose your position and face growing debts. While there are unfortunately common ways to fall into bankruptcy, there are also options available to ease the impact of your debt. 

A New Repayment Plan

Reach out to your creditors to see if you can negotiate a different payment plan. Some mortgage and utility companies are willing to accept lower payments on outstanding loans in exchange for an extended payback term. 

Try Crowdfunding

You should always make sure you have money saved for emergencies like a lost job or a significant medical expense. Many people use crowdfunding platforms like Kickstarter or GoFundMe and rely on the charity of their fellow man to help alleviate some of the weight of a costly medical operation.

Prioritizing Your Debt

When it comes to paying your debts, there are a few methods you can try. For some, it might be beneficial to pay off their debts based on the amount of money owed. Dedicate a little extra cash each month to quickly paying off the smallest debt while you pay the minimum amount owed on the rest of your bills.  You can also sort your bills by interest rate and pay off the bill with the highest interest rate first before working your way through the rest of your debts.


Bankruptcy can feel like the end of the world, but it is designed to give you a new start. You need to look at your debts and figure out the best payment method for you. You should also see a financial planner or bankruptcy lawyer to advise you on your journey. Together, you can avoid these significant issues and enjoy financial security.

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