What Are The Leading Causes Of Bankruptcy?

Most Common Causes of Bankruptcy

Personal bankruptcy filings in the United States have risen. A look at the last two years of data will help shed some light on the most common causes of bankruptcy. Many feel confident they already know what the largest root cause is for personal bankruptcy, but the real causes are indicated by several current studies.

In 2012 some 1.4 million Americans were forced to declare bankruptcy and start over. But why did so many need to harm their credit, lose their property, and seek a new beginning? Debt is a quickly growing problem in the United States and an analysis of the current causes of the bankruptcy crisis can help millions of Americans avoid financial ruin. Many are aware of that the leading causes include medical expenses, credit card debt, unemployment, frivolous and irresponsible spending, and unexpected life events. But to what degree do these causes affect current bankruptcy filings?

It seems to be a commonly accepted belief that the healthcare system is to blame for the vast majority of bankruptcy filings. But are medical expenses really the leading ravager of personal finance? Or have the numbers been misinterpreted? There have been numerous studies in the United States that attempt to dissect the leading cause of bankruptcy. However the conclusions drawn from the studies have varying results and the conclusions have been misunderstood.

Are Medical Expenses Really the Largest Cause of Bankruptcy in the United States?

It is well known throughout the world that the cost of healthcare in the United States is astronomical. Recent healthcare reform through the Affordable Care Act (ACA) sought to correct this problem, but has not yet succeeded.

Surprisingly, the lack of insurance coverage is not the only culprit that causes bankruptcy in these situations. There are many Americans that do have insurance but still get slammed with hopelessly overwhelming out-of-pocket expenses. In some cases their insurance will cover a 6-figure expense, only to incur a 5-figure copay.

Many websites, news sources, and law firms on the internet like to cite that over 62% of bankruptcy filings were mainly caused by medical expenses. However this figure is based on Harvard study from 2007. Though medical expenses certainly cause many bankruptcies, it does not appear that medical expenses are the leading cause today.

The Leading Cause of Bankruptcy

A more recent study conducted in 2013 by the Center for Consumer Recovery observed the causes of 3,082 bankruptcies across the entire nation. They conducted the investigation by studying each credit report and bankruptcy petition, and even held an interview with the participants. The conclusion was that instead of medical expenses, debt collection litigation was the leading cause in 2012 and the statistics are astounding.

2,404 of the bankruptcies (78%) observed in the study were determined to have mainly been caused by debt collection litigation. Instead of their debts forcing them into bankruptcy, the straw that broke the camel’s back was the cost of being sued by debt collection agencies. 74% of the bankruptcy sample admitted to being heckled by debt buyers and collection agencies. Once they were backed into a corner, they felt that the only way to escape was to file bankruptcy.


Though not the leading cause, unemployment is a common reason that many are forced to declare bankruptcy. In 2012 the unemployment yearly average in the United States was a staggering 8.07%. The great recession left many without a means to provide for their families and pay their debts.

Ning Zhu from the University of California conducted the Household Consumption and Personal Bankruptcy study and found similar results to the study by the Center for Consumer Recovery. The study did not find medical bills to be the leading cause. Additionally, his study determined that while unemployment does play a significant role in many bankruptcies, it is very far from being even within the top three causes. 

Spending Sprees, Lack of Budgeting, and Fiscal Irresponsibility 

Unfortunately, there is still a large percentage of people that file for bankruptcy because they simply fail to create or follow a budget. Debt is accrued after spending sprees and fueled by the failure to make monthly payments. The media drives many people today to place a higher value on their image than their finances. Because of this, people choose short term gratification at the cost of living beyond their means. The result is usually relentless calls from debt collection agencies and eventually bankruptcy.

The study performed by Ning Zhu found that overspending was the leading ravager of personal finance. With no cash to pay for consumer goods, their credit card debts mounted and proceeded to rack up fat monthly payments because of high interest rates. These results correlate with the study by the Center for Consumer Recovery. Of the participants in this study, nearly three fourths (72%) were shown to attribute their largest debts to credit card spending.

Inadequate Means to Meet the Cost of Living

Conversely there are also people who simply don’t have enough money and turn to credit cards to just meet their basic needs such as food, rent, and transportation. Many fiscally responsible individuals are forced to declare bankruptcy due to reasons outside of their control. We can definitely attribute some bankruptcy filings to these types of situations, though they are certainly not among the leading causes. 

Unexpected Life Events 

Another reason people are forced to declare bankruptcy is a category called unexpected events. This is a wild card or miscellaneous category that encompasses many different life events. A few of these include personal property damage due to floods, fires, tornados, hurricanes, and earthquakes. The untimely passing of a loved one, divorce, or any number of other unforeseeable disasters has forced many to seek a new beginning by filing for bankruptcy.

However, the study by Ning Zhu showed that the root cause of these types of bankruptcies was, again, irresponsible spending. Once a person had stretched their financial means to the limit, all it took was one unexpected event to send them careening out of control into bankruptcy.

The Law Offices of Jason R. Moseley is a South Bend, Indiana based bankruptcy attorney. They concentrate in Chapter 7 bankruptcy, Chapter 13 bankruptcy, and can help you stop harassment from creditors. For more information, please visit https://www.moseleymartinez.com.