Causes of Bankruptcy

People can get into different types of bankruptcies due to financial hardships and in some cases, due to reckless spending. However, in most cases, bankruptcy is caused by economic hardship. Some of the instances include low-income individuals facing a job loss and end up not meeting their expenses.

The numbers of bankruptcy in the U.S are alarming and they are increasing at a fast rate. Majority of people cannot pay off their debts. This has attracted the attention of Congress to address the issue by putting in place stringent legislation to make it challenging to qualify bankruptcy status. But what are the main causes of bankruptcy? The following are the causes of bankruptcy for most individuals.

Loss of a Job

One can lose a job due to termination, layoff or resignation. When one loses a job, consequently, an income is also lost. In some cases, individuals who are laid off can get severance payslips, but in most cases, many are not issued with a prior notice. For such individuals, if they do not have emergency funds, it can be disastrous since they are forced to use credit, which accumulates and makes one go into bankruptcy. Also, when insurance coverage is lost, the cost of COBRA insurance can be extremely high and can drain the limited resources owned by job seekers.

Medical Expenses

Harvard University’s study showed that medical bills cause 63% of bankruptcies. Among the respondents of the survey, 78% indicated that they had health insurance. It means that medical expenses not only affect those who are not insured.

Injuries and other serious diseases can lead to the accumulation of substantial medical bills. Such bills can drain savings and retirement benefits and funds meant for education. After the exhaustion of funds, a family gets into bankruptcy, making it rely on credit to cater for the bills. The bills can be higher compared to the income lead to the accumulation of debt. In such a case, the family shelter may be bankruptcy.


When a couple separates, it creates a huge financial strain on each one of them. The old saying that two are better than one is valid. Separation or divorce attracts legal charges, which can be disastrous, especially if they did not have emergency funds. Then the other problem comes due to the sharing of assets and decree for child support. This is later followed by the costs of maintaining two separate households. Catering for these expenses can force an individual to turn to credit, which is likely to accumulate with time and get challenging to repay.

Unexpected Expenses

Some of the unexpected expenses and loses include theft, casualties and natural calamities such as floods and tornados. It becomes difficult for homeowners to decide what coverage to take. In the case of such an event, they must find alternative shelter and still look for food and other needs.

Poor Credit Management

Credit is an ideal idea when there is an emergency or when it is the only way out. It is essential to learn how to control your spending on credit cards and other loans such as car loans and mortgages. These loans can accumulate until the borrower is unable to repay them. If friends and relatives fail to intervene in such a situation, bankruptcy is inevitable.

Statistics show that debt consolidations fail for several reasons, among them being a delay in filing. In the case of unsecured loans, home equity loans are better alternatives. However, once the credit is exhausted, borrowers can face foreclosure of their homes in case they fail to make the payment.

Utility Bills

With the rising costs of managing a home, some bills such as heating, air conditioning, internet connectivity and electricity can be too high making one to borrow. It is essential to make sure you borrow what you are capable of repaying. Make sure that your cash outflows are lower than your income. When the outflows exceed the revenue due to high bills, then bankruptcy becomes inevitable.

Student Loans

Statistics show that student loans account for bankruptcies. It is estimated that 15,000 bankruptcies happen every year as a result of the nonpayment of student loans. If you have not repaid your student loan, you are not alone. If you have unpaid student debts and are looking into a solution for this, you can consider student loans refinance companies

Unexpected Expenses

There are those costs that arise and have not been budgeted for. They may include damages in your house or car and other catastrophic events. In such a case, an individual may be forced to use savings. If these events arise frequently, then the savings can be drained, leaving one at the mercy of friends and relatives or credit. This may finally result in bankruptcy.


It is important to save a significant amount from your income. You can also make since investments to avoid getting into bankruptcy. Most importantly, credit is a good deal, but when one can avoid it, then it would be best. Debt accumulation will drain your savings, investment and can get you even into bankruptcy.

Vincent is a writer and researcher with an interest in finance, banking, startups, and remittance. He holds a Bachelors degree in Applied Statistics with computing. He founded Nexin Startups, an online platform offering startup advice to investors and entrepreneurs. Read more about us and our authors.