Common Causes of Bankruptcy in America
Bankruptcy numbers in the United States are worrying. Over the past few decades, more people have struggled to repay their debts. Because of this, Congress has passed laws that make bankruptcy harder to qualify for. Still, many Americans continue to file each year.
Below are the most common reasons people file for bankruptcy today.
Medical Expenses
Medical bills are the leading cause of bankruptcy. A Harvard University study found that medical issues account for 62% of personal bankruptcies.
Surprisingly, most people affected had health insurance. Serious illnesses or injuries can lead to extremely high bills. These costs can drain savings, retirement funds, and even home equity. When all resources run out, bankruptcy may feel like the only option.
Job Loss
Losing a job can quickly lead to financial trouble. Layoffs, terminations, or resignations often result in sudden income loss.
Many people do not have emergency savings. As a result, they rely on credit cards to pay bills. This can increase debt fast. The loss of employer-provided insurance and the high cost of COBRA coverage make the situation even worse. Long-term unemployment can make recovery very difficult.
Excessive Use of Credit
Poor credit habits also lead many people to bankruptcy. Some borrowers spend more than they can afford. Over time, credit card balances and loan payments become unmanageable.
Debt consolidation often fails and only delays the problem. Home equity loans can help in some cases. However, once equity runs out, homeowners may risk foreclosure as well.
Divorce or Separation
Divorce creates heavy financial pressure. Legal fees alone can be overwhelming. After that come asset division, child support, and alimony payments.
Maintaining two households costs much more than one. Missed support payments can leave one spouse unable to cover basic expenses. In many cases, bankruptcy becomes unavoidable.
Unexpected Expenses
Unplanned events can also cause bankruptcy. Natural disasters, theft, or property damage can destroy finances overnight.
Many homeowners do not carry insurance for events like floods or earthquakes. Without coverage, they may lose their home and belongings. Replacing essentials and finding shelter adds more stress. Some even lose their jobs due to these disruptions.
The Bottom Line
People file for bankruptcy for many reasons. Often, better planning could help prevent it. Building savings, reducing debt, and planning for emergencies make a big difference.
Anyone considering bankruptcy should first speak with a credit counselor or financial advisor. Early action can help avoid this difficult step.
