Most Common Reasons Why People Go Bankrupt

Between half a million and a million people file for bankruptcy in the United States every year. With numbers like those, it’s hard not to worry about what your mounting debts could mean for your future. Here are eight of the most common reasons people go bankrupt and what you can do to help avoid the bankruptcy blues.

Pay cut or job loss

If you currently have a stable job, it can be easy to brush off the idea of bankruptcy. The reality is that no one knows what the future holds, so it’s wise to have a plan in case of a sudden, dramatic change in your income. 

While you’re employed, make sure your resume is updated so you’re ready to land on your feet if you need to start a job hunt. If it’s applicable in your field, keep your portfolio up to date as well. Request letters of recommendation from coworkers, supervisors, and managers for safekeeping and keep copies of any positive performance reviews or feedback.

If you manage your own business and find yourself wondering whether you should declare bankruptcy, the best choice is to contact a bankruptcy lawyer sooner than later. The attorney will make a thorough assessment of your case and provide you with your “what’s next” options. 

Medical expenses

It’s not always possible for everyone to have health insurance, and medical bills can add up quickly when you’re paying out of pocket. 

If you don’t have a comprehensive policy or if your company doesn’t provide one, there are ways to prepare for the possibility of being hit with a hefty bill. Consider adding a rider onto your existing health insurance policy that will pay certain out-of-pocket medical expenses on behalf of the insured person if they exceed a predetermined dollar amount during the policy period (usually one year).

Mortgages or foreclosure

The number one reason people file for bankruptcy is because of mortgages or foreclosure. If you’re unable to make your mortgage payments (or if the bank forecloses on your home) and your house value has gone down, you might be liable for the difference between the value of the house and what you still owe on it. The result? You’re at risk of losing everything—and filing for bankruptcy.

If this sounds like you, talk to a lawyer about your options before it’s too late. You should also consider applying for a reverse mortgage, which allows you to use the equity in your home to help pay off some of what you owe without having to sell the house outright.


When a marriage ends, it can be difficult to divide assets and debts evenly. If one spouse was more responsible than the other, it’s not uncommon for them to take on more debt. If one person can’t afford to handle both mortgages and child support payments at once, they run the risk of filing for bankruptcy.

If you’re filing for divorce or know someone who is, be mindful that this disparity could happen and plan accordingly. You can also do estate planning before a divorce to avoid this issue altogether.

Emergency expenses

Emergency expenses are a common reason people file for bankruptcy. The average American is only one emergency expense away from financial ruin, such as a sudden car accident or injury. It might sound frightening, but it’s true.

The best way to protect your assets is to save and invest. If you want to make sure you don’t lose it all to an emergency expense, avoid putting emergency expenses on credit cards and put away some money for emergencies each month.

Poor credit management

Poor credit management is one of the most common reasons people file for bankruptcy. If you have no experience in the financial industry, managing your credit can be difficult.

To make sure looming credit debt doesn’t happen to you, start by requesting a copy of your credit report to see what’s affecting your credit score. You can receive a free annual report from each major bureau at sites like

The best thing to do for your credit is to keep a close eye on your balances. Keeping balances on your credit lines below 30% protects you from substantial interest payments. It also helps improve your credit score and can help you qualify for increased credit lines in the future.


Utilities are an essential part of day-to-day life. Utility bills are also one of the most common reasons for bankruptcies, as many people struggle to meet their monthly payments. If you know that your expenses will exceed your income, make sure you talk to your utility company about setting up a payment plan or find out about any programs they may offer to help reduce your costs.

Student loans

The cost of attending school is skyrocketing, and tuition costs have increased by 1,120% in the last fifty years. This exorbitant cost can put a lot of stress on students and their parents. Sometimes, it’s too much to handle. If you’re struggling with paying off your student loans, contact your loan companies and ask about options like income-based repayment.


The best way you can protect yourself from bankruptcy is by planning ahead. Budget carefully, and see what you can do without so you can start saving up. If you fear you may be close to bankruptcy, it’s a good idea to contact a lawyer for advice.