Job loss, overspending, medical bills — the truth behind America’s personal bankruptcies goes deeper than the headlines.
The Myth: It’s All About Medical Debt
Many news stories point to medical debt as the leading cause of bankruptcy. And while it’s a factor, it’s far from the whole story. Based on our internal surveys of thousands of bankruptcy counseling sessions since 2005, medical debt ranks third.
So why do people really file? Let’s look at our data — and the stories behind them.
Top Reasons People File for Bankruptcy (Money Fit Survey Data)
- Loss of Income (40%)
Job loss or significant income reduction is the number one reason. Without income, most households cannot cover even basic expenses, much less debt payments. Layoffs, illness, injury, or cuts in hours often leave people without the safety net they need to stay afloat. - Overspending or Credit Misuse (25%)
Relying on credit cards to cover short-term expenses can lead to long-term consequences. High interest rates, impulse spending, and lack of financial literacy are all contributing factors. - Medical Crises (19%)
Even with insurance, a single accident, surgery, or illness can lead to thousands of dollars in out-of-pocket expenses. Medical emergencies often combine lost income with added debt — a double financial blow. - Divorce (9%)
Divorce doubles many expenses while cutting household income. Attorney fees, custody costs, and separating assets often create debt overload for both parties. - Death of a Spouse (2%)
Widowed individuals face ongoing obligations on a reduced income, often with little support. Without life insurance or emergency savings, bankruptcy becomes a last resort. - Addiction (1%)
Addiction to gambling, substances, or shopping contributes to financial instability. While likely underreported, the long-term damage can be severe — and bankruptcy is often a turning point.
The Real Story Behind the 2005 Bankruptcy Law Reform
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed under the assumption that bankruptcy was being abused by consumers. Critics suggested people were overspending and using bankruptcy as an escape hatch.
But our firsthand experience told a different story. Most filers weren’t trying to game the system — they were overwhelmed by circumstances beyond their control.
The rush to file before the law took effect led to a record-breaking spike in filings. The law made bankruptcy more complex and costly, but it didn’t change why people filed. They filed because they had no better option.
How Bankruptcy Trends Mirror the Economy
Bankruptcy filings rise and fall with economic trends:
- Unemployment increases
- Housing foreclosures spike
- Health care access declines
- Inflation outpaces wages
For example, during the Great Recession and COVID-19 pandemic, filings surged as people lost jobs and insurance coverage. When relief programs were introduced, filings dipped. The takeaway? Bankruptcy filings aren’t random — they reflect real-life stressors.
Demographics of Bankruptcy Filers
Bankruptcy affects:
- Adults of all ages, with most between 25 and 54
- Both men and women almost equally
- Homeowners and renters alike
- People with and without children
Most filers are employed — but their income isn’t enough to meet their obligations. They’re doing everything right and still falling short.
Life Events Are the Real Triggers
Few people plan to file for bankruptcy. It usually follows a series of financial shocks: a job loss, a hospitalization, a divorce, or the death of a partner.
One missed payment leads to another. Then creditors start calling. Interest and penalties pile up. Bankruptcy becomes not a choice, but a necessity.
We’ve counseled thousands of people through this process — and the one thing they all have in common is that they tried everything else first.
Why This Matters
If we misjudge why people file, we promote shame — and that stops people from asking for help. Shame delays action, increases stress, and worsens financial outcomes.
At Money Fit, we know bankruptcy isn’t failure. It’s a restart. It’s a way to recover and rebuild. We’re here to help people understand their options — without judgment.
Bankruptcy may be your next step, but it doesn’t have to define your future.
Explore Bankruptcy Counseling →
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Disclaimer: This article is intended for educational purposes only and does not constitute legal or financial advice. Although Money Fit is approved by the Executive Office for U.S. Trustees (EOUST) to provide pre- and post-bankruptcy counseling certificates, we are not attorneys and do not offer legal representation or legal opinions. For legal guidance, please consult a licensed bankruptcy attorney. EOUST approval does not equal endorsement.
Frequently Asked Questions About Why People File for Bankruptcy
Is medical debt the most common reason people file for bankruptcy?
Our surveys show that income loss is the leading reason, followed by overspending and then medical bills.
Are people abusing the bankruptcy system?
The data says no. Most filers are dealing with life events outside of their control and are using bankruptcy as a last resort.
Does divorce really cause bankruptcy?
Yes. It often doubles household expenses while income stays the same. Legal fees and debt division can also make things worse.
