The bankruptcy statistics in America are alarming. The past few decades have seen a dramatic rise in the number of people who are unable to pay off their debts, and Congress has recently addressed the issue with legislation that makes it harder to qualify for this status. 

Following is a list of the most common causes of bankruptcy in America today.

1) Medical Expenses

​​​A study published in the American Journal of Public Health in 2019 found that 66.5% of bankruptcies in the U.S. were due to medical issues like being unable to pay high bills or due to time lost from work. Even with health insurance, high deductibles and copays, plus job loss, impact Americans.

Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills—bills that can quickly wipe out savings and retirement accounts, college education funds, and home equity.

Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not. (Find out what you can do to avoid a financial meltdown when there's a medical emergency. Read Steering Clear Of Medical Debt.)

2) Job Loss

Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice.

Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous. According to Bankrate's 2019 Financial Security Index Poll, nearly three out of 10 Americans do not have emergency savings on hand to help cushion a job loss or other financial crisis. 

Key Takeaways

  • Medical debt and job loss due to illness remain the cause of over half of American bankruptcies. 
  • Three out of 10 Americans do not have an emergency fund. 
  • Bankruptcy is often viewed as a last resort in a financial crisis. 

The loss of insurance coverage and the cost of COBRA insurance can also drain the job seeker's already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay. (For ways to avoid the disastrous effects of unemployment, read Planning For Unemployment and Build Yourself An Emergency Fund.)

3) Poor or Excess Use of Credit

Some people simply can't control their spending. Credit card bills, installment debt, car, and other loan payments can eventually spiral out of control until finally, the borrower is unable to make even the minimum payment on each type of debt.

Having an emergency fund, medical insurance, and keeping your debt-to-credit ratio low are all ways to protect yourself from a future declaration of bankruptcy.

If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative.

Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing of bankruptcy for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well.

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Top 5 Reasons Why People Go Bankrupt

4) Divorce or Separation

Marital dissolutions create a tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support, and/or alimony, and finally the ongoing cost of keeping up two separate households after the split.

The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute. (Learn more about this in Get Through Divorce With Your Finances Intact.)

5) Unexpected Expenses

Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage to be covered from certain events such as earthquakes.

Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime.

While uncommon, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs.

The Bottom Line

There are many reasons why taxpayers are forced-or choose-to declare bankruptcy. But many times, common sense, sound financial planning and preparation for the future can head off this problem before it becomes inevitable.

Those who are contemplating this possibility should seek a credit counselor or financial planner before choosing this alternative.