In many cases, bankruptcy is not caused by overspending or recklessness. Filing for bankruptcy is often seen as a negative option for people who cannot manage their money. On the contrary, many people file for bankruptcy or hard-working individuals who simply cannot afford to deal with major and expected expenses such as medical bills or job loss. Additionally, bankruptcy filings usually increase whenever there is an economic downturn. We will discuss some of the most common reasons people file for bankruptcy in the United States.

Divorce and Legal Separation

Going through a divorce can be traumatic on many levels, including emotionally and financially. When two spouses get divorced, their income is divided. Many couples will go through a period of legal separation. The expensive setting up another home, such as paying another rent payment or mortgage, can hurt the couple’s financial situation. They will also incur legal fees, which can be extremely high depending on the divorce. 

The longer the divorce lasts, the higher the legal fees and costs. The couple will need to deal with the division of their marital assets, spousal support, child support, and/or alimony. Finally, they will need to deal with the ongoing cost of maintaining two separate households after the divorce. 

Medical Bills Due to an Illness or Disability

Severe illness or injury can happen to anyone at any time. It only takes car accidents or diagnoses to result in hundreds of thousands of dollars in medical bills. Although many Americans have health insurance, they may still have to pay expensive premiums. A patient’s treatment may not be covered by their insurance, costing them thousands of dollars in additional fees. Due to the high cost of hospital stays, surgery, and medication, one illness or ailment can devastate a person financially, making it necessary to file for bankruptcy.

Job Loss or Reduction in Income

The coronavirus pandemic has caused a volatile job market and economy. Many people have been laid off or had their hours cut unexpectedly. Before the great recession, most people filing for bankruptcy had lost their incomes due to unemployment. This group of bankruptcy filers ranged from around 35% of all filers. That figure got as high as 42% of all bankruptcy filers in the middle of the great recession. Currently, over half of Americans have less than three months’ worth of expenses saved in their emergency fund. 

Out of every four Americans do not have an emergency fund at all, up from 21% of Americans in 2020. Only one out of every six Americans reported having more cash saved today than before the pandemic. 34% of people say they have last money in their savings account, as I did before the coronavirus pandemic. The lack of emergency fund savings can be devastating for people who experience job loss. Many Americans cannot survive two to three months without a job, and they are living paycheck to paycheck. If they lose their job or have their income reduced in any way, they may not be able to pay their bills. Filing for bankruptcy can be one of the best options to protect themselves and their savings.

Job loss is due to a disability or medical illness in some cases. When an employee loses their job, the employee will also lose health insurance coverage. The employer needs to pay for intermediary COBRA insurance that will drain the job seeker’s limited financial resources. Those who cannot find another job for an extended time frame may not be able to recover from their lack of a steady income to keep their creditors satisfied. Most employees do not receive any type of severance package to help tide them over. 

Unexpected Emergencies

Many people who need to file for bankruptcy do so because of an unexpected expense. They may have experienced property loss due to theft or natural disaster. Floods, tornadoes, and earthquakes can all place someone who was otherwise financially stable into an unstable situation. For example, many homeowners do not know that they have to take out separate insurance coverage for some types of natural disasters such as earthquakes. People who do not have coverage can lose their homes and most of their possessions. They will run through their emergency funds quickly by merely paying for temporary shelter.

Consumer Overspending

Approximately one-quarter of people who file for bankruptcy say that they have overspent and abused credit cards and consumer debt, leading them to seek bankruptcy protection. Poor personal finance choices have played a significant role in bankruptcy filings for any consumer-driven economy. As mentioned above, the market has become more volatile due to shutdowns in the coronavirus pandemic. 

Many people have used credit cards to get them through the end of the month and pay their bills. Once they are a significant amount of money to the credit card company, it can be difficult to continue paying their credit card bills and other bills. The consumer debt begins to snowball. Filing for bankruptcy can be one of the best options for people with a significant amount of consumer dad to seek help.


Americans have become increasingly dictated to opioids. Approximately one out of every hundred bankruptcies result from some type of addiction, whether it is substance abuse or gambling. Alcoholism is another common cause of financial destruction. We suspect that the number of people who file for bankruptcy due to addiction is higher than we know because many people do not self-report. For example, for gambling addicts, the number of bankruptcy cases likely ranges up to 10%. Even when people try to get help for their addiction, they can suffer devastating financial consequences. Many insurance companies do not cover stays in rehabilitation facilities, requiring people to pay out of pocket.