7 Most Common Causes of Bankruptcy in America

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By Jacob Maslow

Bankruptcy is something most people want to avoid unless, of course, in deep debt, insolvency and bankruptcy are the only way to be released from the constant financial strain. The number of bankruptcies has increased steadily since the 1980s, and as of 2020, 522,808 people in the United States filed for bankruptcy. Of these, 97% are individuals, and only 3% are businesses.

Bankruptcy is a complex process, but it can be the best option for those who cannot pay their mounting bills. Once bankruptcy is filed, creditors are required to leave the debtor alone. The debtors will be given a reasonable repayment plan, and many of the debts can be forgiven. In addition, bankruptcy can enable people to retain their assets, including their homes, and eventually recover their credit.

The following are the top seven reasons people in the United States go bankrupt:

  1. Healthcare Costs
  2. Divorce
  3. Pay Cuts and Lay Offs
  4. Student Debt
  5. Spending Too Much
  6. Over-Reliance on Credit Cards
  7. Emergencies

One sad fact about bankruptcy is that medical expenses cause 62% of all bankruptcies. Soaring medical costs and medication for less common yet severe ailments can lead to people filing for bankruptcy. This is unfortunate because many of these conditions are not the fault of people struggling to secure life-saving medication. This statistic is yet another reason healthcare is such a hotly debated topic in US politics.

Divorce can create substantial instability in family structure and our emotional lives and can take its toll on both parties in the divorce. Women often make less money than men, and when their marriage dissolves, they may find that they have to find ways to increase their income while shouldering much of the childcare burden.

Although many women do receive child support, it may not cover their expenses. On the other hand, many men are expected to pay extremely high child support levels, even from spouses who can work. These men may find they cannot pay high child support payments while maintaining an apartment that is large enough to accommodate children when they come for visitation. Either of these scenarios can lead to bankruptcy.

Many companies want to cut costs and may do so by slashing wages or downsizing their workforce. In addition, the increasing instability of careers in the United States makes more workers vulnerable to debt. Workers who don’t have time for a side hustle or an additional part-time job may end up in debt.

It is estimated that 62% of college graduates have significant amounts of debt. Therefore, starting life in debt can lead to more debt. In addition, this situation can get young adults accustomed to debt as a way of life.

Although spending too much seems to be an apparent cause of bankruptcy, the fact is that excessive spending is the cause of only 5% of bankruptcies. Most people do not go bankrupt because of intentional extravagance, but usually from life circumstances.

US consumers rely on credit cards for a large proportion of transactions. It is easy to lose track of how much money is being spent on a credit card. In addition, credit cards can make indebtedness a habit. Many credit card companies provide big loans with extremely high rates of interest. This can get consumers started on the road to bankruptcy.

Finally, emergencies are a significant cause of bankruptcies. For example, the COVID-19 crisis caused many consumers to experience financial problems. Lockdowns led to work stoppages, job losses, and the shuttering of small businesses. Similar emergencies can cause massive debt, which ultimately drives people to file bankruptcy.

Contrary to widespread belief, bankruptcy is often not the result of shopping addictions, overindulgence, or a lack of concern about indebtedness. Instead, medical expenses, emergencies, divorce, and other life events can lead to bankruptcy. Understanding that bankruptcy can happen to virtually anyone should help people take steps to prevent it.

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