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Most Common Causes of Bankruptcy and How to Avoid Them

The bankruptcy stats in the U.S. are truly alarming. Thousands file for bankruptcy every day, hoping to get a fresh start. But serious debt isn’t merely a circumstance that occurs without a cause or a stand-alone issue. More often than not, it is the result of a combination of different factors and financial setbacks, which either parallel or contribute to financial distress. And while those factors may shift around a bit in order, the major ones rarely change. Below, experts look into the most common causes of bankruptcy in America today.

The most common causes of bankruptcy and their remedies

1. Medical problems

Medical bills are reported to be the No. 1 cause of bankruptcy filings in the U.S. Illness and injury aren’t usually something one can anticipate. But, if it comes about, expenses can start piling up and quickly get out of control if not handled diligently. Even with substantial health insurance, it can be highly frustrating for everyone involved, piling additional hardships on people and pressing families to the edge. In fact, roughly one in five adults that have accumulated healthcare debt is either driven out of their homes or declared bankruptcy.

A medical practitioner looking through patients’ records
Medical expenses are the No. 1 reason people file for bankruptcy.

The fix? Simply be prepared. No matter how young and healthy you are at the moment, no one is really immune to accidents. So, always be sure to get the best health coverage that you can afford. It can be a major financial lifesaver in case of injury or sudden illness. You should also plan for deductibles and out-of-pocket expenses and set money aside in your savings account. Let that be your safety net. Plus, the money that goes into these accounts comes out tax-free – so you’ll reduce taxable income.

2. Loss of income

Right next to medical bills, there’s loss of income, research says. And, given that most folks rely on their jobs to pay their bills, that shouldn’t come as a surprise. According to some surveys, more than half of U.S. citizens live paycheck to paycheck. So, what happens when those paychecks stop? The answer? – financial trouble, and a lot of it, since few have the savings to tide them over for long. But being unemployed also means that you can lose your health insurance. This, in turn, increases the risk of getting into debt in case anyone in your family gets sick or hurt.

So, what to do? According to experts, having a savings plan in place can go a long way toward relieving the stress of lost income. Start small and prioritize building up 3-6 months’ worth of living expenses, and only after should you start looking at longer-term savings goals.

3. Poor spending habits

With events like job loss and long-term medical issues, pinpointing how it all started spiraling downward is relatively straightforward. With poor spending or living beyond your means, not so much. You wake up one day to see that the bills are piling up all around you, and you just don’t understand how it reached this point. But the answer is right there –poor financial management got you here. And, if you mix it up with a few unexpected costs here and there or an unexpected tragedy, you’re suddenly left with a mountain of debt that only keeps piling up. Simple overspending drives not only personal bankruptcies but business bankruptcies as well. Many entrepreneurs, hungry as they are, make the mistake of spending too much, too early, and on the wrong things.

A man holding coins in his hand.
Living beyond your means is one of the most common causes of bankruptcy

However, unlike losing a job or getting ill, this is one area where you have some control. Financial management is a life skill that can be learned. Start tracking your spending, and change your bad habits. Learn how to budget, manage your finances, and start saving for emergencies.

4. Unexpected emergencies

Another common reason why people go bankrupt is unexpected expenses. This could be anything from natural catastrophes, theft, medical emergencies, sudden death, or loss of property to smaller financial disruptions, such as a car repair. These can strike at any time, and what many people aren’t aware of is that different types of perils require separate coverage. With no insurance, you may lose not only your home but everything else you own as well. Replacing these items and finding immediate shelter and food all take money. What’s more, if you lose your entire wardrobe in a natural disaster, dressing appropriately for work may become a problem, which could cost you your job.

So, make sure it doesn’t come to this. Having a financial cushion is essential, so make sure to build an emergency fund of 6-12 months’ worth of income. Also, contact a bankruptcy attorney and begin fighting your debt as soon as possible.

5. Addiction issues

Among the most common causes of bankruptcy, some can be temporary (loss of income), or some can be easily remedied (poor money management skills). And then there are those that are a lot more difficult to overcome. Substance abuse disorders can have devastating effects on one’s financial well-being and that of their nearest and dearest. It takes a lot of money to support the habit, and even when an addict is in recovery, financial problems do not end.

A person holding pills.
Addiction issues are very persistent and difficult to overcome

According to, rebuilding your finances and getting back on track is a crucial part of rehab. In addition to treatment for your addiction, the work covers extensive financial organization, a necessary step to slowly start rebuilding your life after it had been upended by poor habits.

6. Divorce/separation

Marital dissolution is a harbinger of debt and one of the most common causes of bankruptcy. Legal fees alone are enough to force some to file. And when you add division of marital assets, taking on a portion of your ex-partner’s debt, a decree of child support, and alimony, it’s easy to see how it can put a tremendous financial strain on both parties. Finally, there’s the ongoing cost of splitting up a household and handling the living expenses with significantly less income after the split. If you find yourself in this situation, an experienced lawyer can help walk you through your bankruptcy options, advise you, and determine if filing is the right solution for you.

The Law Firm of Freire & Gonzalez, P.A., is ready to guide you through bankruptcy and help you regain control of your finances and your life. If you have any questions, please contact us at 305-826-1774 and our locations:

Bankruptcy Lawyers Miami, FL

Bankruptcy Lawyers Fort Myers, FL

Bankruptcy Lawyers Hialeah Myers, FL

Bankruptcy Lawyers Cincinnati, OH

Bankruptcy Lawyers Blue Ash, OH

Bankruptcy Lawyers Hyde Park, OH

Bankruptcy Lawyers West Chester, OH

Bankruptcy Lawyers Northern Kentucky

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