What are the most common reasons people file for bankruptcy?

Most media reports about the climbing bankruptcy rates in the US, when the media cares to report about them at all, typically blame most bankruptcies on medical problems, citing studies that show that most people who file for bankruptcy have medical debts.

Oddly enough, most households, in general, have medical debts they are dealing with. That does not mean the medical debts lead most households to bankruptcy. Our own surveys of thousands of bankruptcy filers tell a different story since we first became involved in counseling and educating bankruptcy filers back in 2005.

Most bankruptcy filers (40%) have lost their employment or otherwise experienced a significant decrease in their income, causing problems with debts and bills. Other reasons include overspending (25%), medical crises (19%), divorce (9%), being widowed (2%), and dealing with addictions (1%).

Most filers are consumers dealing with personal finance issues. The most common bankruptcy chapter filing is Chapter 7, or personal liquidation, followed by Chapter 13 (aka repayment plan). Business bankruptcy filings make up a tiny portion of overall bankruptcies in the US each year, even though they typically make headlines.

Famous Bankruptcy Filers

Other bankruptcy filers who make headlines include a number of successful businessmen and women. It might surprise you to find “Honest Abe” Lincoln on the list of bankruptcy filers. While the bankruptcy laws in the 1830s differed greatly from those in place today, Lincoln was a business partner in a general store that failed. Besides surrendering a horse and surveying equipment, Lincoln had to make payments to his creditors for the next 17 years.

More recently, well-known bankruptcy filers over the past five or six decades include rapper 50 Cent (Chapter 11), Marvin Gaye (following a divorce), Kim Basinger (contract problems and a lawsuit), Meat Loaf (following a lawsuit), Dave Ramsey (failed real estate business), Cyndi Lauper (early-career troubles), MC Hammer (poor business decisions), Walt Disney (studio production costs), George Foreman (spending and income dissimilarities), Elton John (excessive spending), director Francis Ford Coppola (poor film sales), MLB pitcher Curt Schilling (business investment failure), Mike Tyson (consumer overspending), and Larry King (consumer overspending).

Number of Bankruptcy Filers

Bankruptcy filings have ebbed and flowed over the years, following a sometimes predictable, sometimes confusing pattern mostly related to greater economic conditions.

In the late 1990s, bankruptcy filings continued to climb to unprecedented heights, fueled by the tech bubble bursting, but also as a result of the hyper-consumerism of the 90s in general. Political pushes for bankruptcy law reform began in earnest in the early 2000s, and by 2005, lawmakers and the president signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

Its very name suggested a concern in Washington that bankruptcy filers were taking advantage of the system, running up huge consumer debts and simply filing for bankruptcy as a way to get out of paying their debts. Later surveys would prove this suspicion completely unsupported and false, but the law of unintended consequences kicked in as BAPCPA went into effect. Bankruptcy attorneys around the country urged anyone with even a hint of a thought that they might file for bankruptcy to file before the new law made it more difficult or even impossible to file.

As a result, bankruptcy filings skyrocketed in September and the first half of October 2005, ahead of the law’s implementation. So few consumers filed over the next year that lawmakers crowed about the success of their endeavors. As it turned out, more people filed in the 45-day period leading up to the law’s enactment than had filed previously in whole years. There was hardly anyone left to file except those truly in danger of losing their homes and livelihood.

As highlighted above, we can see that as the Bankruptcy Code has been amended over the years, especially as it relates to the last 30 years, consumer filings have increased dramatically due to increased access and efficiencies as it relates to the filing process.

Demographics of Bankruptcy Filers

Over the coming five years, bankruptcy filings increased sharply, mostly because they were starting literally near zero in some districts. From the end of 2005, Money Fit by DRS began providing the credit counseling and debtor education required by BAPCPA, and we also began surveying our bankruptcy clients to see why they were filing.

Based on these surveys and on the budget counseling we provided to those going into bankruptcy, we quickly understood the fallacy of the 2005 law’s premise. Consumers were not trying to take advantage of the bankruptcy law to get out of their debts. Neither were consumers suffering through bankruptcy because of poor medical insurance and overwhelming medical debts.

Unemployment Causes Most Bankruptcies

Instead, we could see in our counseling sessions, that bankruptcy clients were telling us in their surveys, that they were filing for bankruptcy overwhelmingly because they had lost their incomes due to unemployment. Prior to the Great Recession, this group of filers ranged around 35% of all bankruptcy filers. By the depths of the Great Recession, this figure got as high as 42% of all filers.

While emergency savings funds and controlled consumer spending could mitigate many bankruptcies caused by unemployment, consumer bankruptcy abuse clearly was not an issue in 2005, nor has it been an issue since 2005.

Consumer Overspending and Personal Bankruptcies

Staying consistent from the time we started surveying our bankruptcy clients through the Great Recession and its recovery, roughly one-quarter of bankruptcy filers indicate that their overspending and abuse of credit cards led them to seek bankruptcy protection.

Poor personal finance choices have always played a large role in the bankruptcy filings of any consumer-driven economy. As the economy strengthens, consumer confidence increases, and consumers begin to overuse their credit cards and spend more and more of their monthly incomes on consumer wants. This does not equate to fraud or abuse of the bankruptcy law, but it does indicate problems with financial decisions on a personal level.

As soon as economic conditions begin to deteriorate, these consumers living paycheck-to-paycheck (or, more accurately, credit card-to-credit card) have no savings funds to help them pay their debts, and their situations turn from bad to worse.

Medical Debts and Bankruptcies

It comes as no surprise to any American adult involved in paying medical insurance premiums that healthcare costs, insurance coverage, and out-of-pocket maximums have dramatically increased over the past twenty years. With these increases in household financial responsibilities for medical emergencies and services as well as prescription drug costs, the media has quickly pointed to medical-related expenses as the cause for increasing bankruptcy rates. However, surveys of our clients indicate that just one in five filers point to medical expenses as the cause of their financial crises.

Divorce and Bankruptcies

For individuals who have gone through a divorce, the fact that divorce does not occupy the top spot for causes of bankruptcy can seem surprising. Those who have never gone through a divorce can seem surprised that divorce even makes the list of top causes of bankruptcy.

Considered rationally, divorce clearly adds financial burdens to both parties but particularly so in the case of child custody arguments. Attorney fees mount on both sides. The household that previously had one set of household expenses now splits and becomes responsible for two sets of household expenses, often with minimal change to their overall income.

In community-property states such as those on the West Coast and in the southwest, debts incurred during the marriage remain the responsibility of both divorcing parties, regardless of who took out of the debt or even if the other spouse was even aware of the debt. Cases abound of revenge spending leading up to the divorce, where one spouse takes on massive amounts of credit card debt to make consumer purchases with the expectation that the soon-to-be ex-spouse will have to help pay off the balances. Such actions curry no favor from judges in these cases.

Still, we have worked with many parties of divorce who have gone through the proceedings, agreed to the divorce decree that delineates the responsibilities of each party for the couple’s debts after the divorce, and then who come to find out too late that their creditors have never been and never will be a party to the divorce nor bound by the divorce decree.

Too often, one ex-spouse stops paying the debt or debts as required by the divorce decree. Next, the creditor will then go after the other ex-spouse because she or he is still legally responsible for paying the debt, regardless of the statements in the decree.

Unless you remove your name from the debt, be it a mortgage, truck loan, store card, or credit card, you will still be legally and financially responsible for ensuring monthly payments arrive on time and as agreed. Otherwise, you might find your credit suffering and even your wages garnished.

In such cases, we often meet with the second ex-spouse whose only remaining option involves bankruptcy, since she (usually she, though not always) is unable to afford her current expenses and the addition of debts her ex has stopped paying.

Widows and Bankruptcy

Not surprisingly, the situation many recently widowed individuals find themselves in can lead to filing for bankruptcy. This holds particularly true in cases where the deceased spouse had no life insurance coverage (or insufficient, anyway), and the surviving spouse has ongoing financial obligations to cover, including a mortgage, car payments, credit card debts, and other consumer debts.

Often without a history of recent professional employment, the surviving spouse finds herself (or himself in a few cases) unable to keep up with the mounting bills and debt payments. Trying to remain in the family home, she or he may sacrifice their credit and cease paying all other debts and obligations only soon to find that creditors seek restitution in court, leading to repossession, wage garnishments, and other difficult scenarios. Bankruptcy can often offer the only path of relief, it does not always guarantee the surviving spouse and children can remain in their home.

Addictions and Personal Bankruptcy

Although our surveys suggest that just one in a hundred personal bankruptcies result from addictions (from gambling to substance abuse), everyone understands that figures for self-reported addictions typically come in lower than the reality. A study by Napper, Fisher, Johnson, and Wood shows such self-reporting can range from 95% accurate on the upper end to barely 70% accurate on the lower end.

For gambling addicts, the figures likely fall far short of reported figures. We suspect actual bankruptcy cases caused by addiction likely range from 5% to 10%.

Unfortunately, filing for bankruptcy in such situations appears to play more the role of a bandage than of a cure. Even after bankruptcy, the individual(s) will continue to struggle with the addiction, leading to further financial struggles that may not find relief through bankruptcy, since Chapter 7 filings are limited to once every eight years.

For anyone considering bankruptcy or struggling to protect their home, vehicles, wages, or other assets, we highly recommend you meet with an attorney who specializes in bankruptcy law.

Related Questions

What are the advantages of filing for bankruptcy?

The main purpose of a personal bankruptcy filing is to protect the individual’s or household’s assets, from real estate to vehicles to regular wages. This protection often keeps creditors and lawsuits from foreclosing, repossessing, or garnishing these assets, respectively.

Do taxpayers pay for people’s bankruptcies?

Taxpayers do not pay bankruptcy filer fees or for losses incurred by creditors in such filings. Instead, creditors typically factor their losses from bad debts into their product or service pricing and their business practices, effectively passing the cost of bankruptcy on to their other customers.

Filing Bankruptcy in America: Four-Part Series

Money Fit by DRS Inc. is publishing a four-part series to explain the bankruptcy process in great detail. We intend to create a guide for individuals looking to understand the bankruptcy process so they can make informed decisions on whether this is an alternative to dealing with their debt that they should explore further.

Read About Bankruptcy In America

Related Content:

When to file for bankruptcy

What to do if you can afford to file for bankruptcy

Bankruptcy and the COVID-19 Pandemic

Bankruptcy Counseling & Debtor Education Certificates

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Debt Reduction Services, Inc. and its financial education arm, Money Fit by DRS, offer the following housing counseling and educational services related to housing, personal finance, and bankruptcy certificates to consumers:
  • Housing Education Courses: DRS offers many online self-guided education programs classified as Financial, Budgeting, and Credit Workshops (FBC), Fair Housing Pre-Purchase Education Workshops (FHW), Homelessness Prevention Workshops (HMW), Non-Delinquency Post Purchase Workshops (NDW), Predatory Lending Education Workshops (PLW), Pre-purchase Homebuyer Education Workshops (PPW), and Rental Housing Workshops (RHW). These courses help participants increase their knowledge of and skills in personal finance, including home affordability, budgeting, and understanding the use of credit, as well as predatory lending, loan scams, and other fraud prevention topics, fair housing, rental topics, pre-purchase homebuyer education, non-delinquency post-purchase topics including home maintenance and/or financial management for homeowners, homeless prevention workshop, and other workshops not listed above relating to personal finance and housing. Course details are found below under “Housing Workshops.”
  • Home Equity Conversation Mortgage (HECM) Counseling (RMC): Via telephone and virtual platforms, we offer the required HECM counseling nationwide in addition to in-person counseling in Boise, Idaho. We also offer in-home counseling options in thirty counties across southern Idaho for an additional fee to cover our travel and additional staff time costs.
  • Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase) (FBC): Clients receive counseling and materials on the proper maintenance of their home and mortgage refinancing. Clients can find help and resources by phone, in our Boise office, or virtually on all topics related to stabilizing their long-term homeownership.
  • Services for Homeless Counseling (HMC): Clients receive phone, virtual, or in-person (Boise) counseling to evaluate their current housing needs, identify barriers to and goals for housing stability, establish a path to self-sufficiency, and connect with emergency shelters, income-appropriate housing, and/or other community resources (e.g. mental healthcare, job training, transportation, etc.).
  • Pre-Purchase Counseling (PPC): Clients receive counseling through the entire homebuying process. Assistance may involve creating a sustainable household budget, understanding mortgage options, building their credit rating, and putting together a realistic action plan to set and achieve homeownership goals.  Additionally, clients will receive materials and resources about home inspections and other homeownership topics relevant to successfully maintaining a home.
  • Rental Housing Counseling (RHC): Via phone, in-person appointments (Boise, ID), or virtual platforms, clients receive housing counseling relevant to renting, including rent subsidies from HUD or other government and assistance programs. Topics can also address issues and concerns having to do with fair housing, landlord and tenant laws, lease terms, rent delinquency, household budgeting, and finding alternate housing.
DRS also offers the following services:
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Through such services, DRS has established financial relationships with hundreds of banks, credit unions, and creditors such as American Express, Bank of America, Barclays, Capital One, Chase, Citibank, Credit One, Discover, Synchrony, US Bank, USAA, Wells Fargo, and others.

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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

RentalFair HousingPredatory Lending / HOEPAPost-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. creditbudgetinghomeless preventiondebt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).

Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

RentalFair HousingPredatory Lending / HOEPAPost-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. creditbudgetinghomeless preventiondebt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).