Bankruptcy. It’s a word that strikes fear into the hearts of many. But what drives people to take this drastic step? Job loss, medical bills, divorce – the list goes on. In 2023 alone, there were over 452,000 bankruptcy filings in the U.S. This includes both business and nonbusiness bankruptcies. 

But here’s the thing: bankruptcy isn’t the end of the world. It’s a chance to hit the reset button and start fresh. And with the right strategies, you can avoid it altogether. Ready to learn why people file bankruptcy and how to steer clear of it? Let’s dive in.

Top Reasons People File for Bankruptcy

Why do people file bankruptcy? Every story is unique, but most share at least some contributing factors.

In 2023, there were 434,064 non-business bankruptcy filings in the U.S., each with its own story – and likely multiple causes behind it.

Loss of Income

Most bankruptcies happen for one reason: too much debt and too little income. Someone took on a sizable mortgage, then lost their job.

Another was injured in a car accident and ended up with medical expenses and a prolonged leave of absence from work without pay.

Medical Expenses

Though there are a million possible reasons why people might file bankruptcy, medical expenses are commonly cited.

Serious injury or illness can affect anyone, at any time, and result in hundreds of thousands of dollars in medical bills. Once savings, college funds, retirement accounts, and home equity have been wiped out, bankruptcy may be the only option.

Unaffordable Mortgage

Job loss, medical expenses, and escalating mortgage payments are among the common reasons people file for bankruptcy.

When one party refuses to make alimony or child support payments, it can also leave the recipient in financial trouble, potentially leading to bankruptcy.

Overwhelming Debt

The easy availability of credit cards and installment loans causes many people to spend money they don’t have. When this gets out of control, some may find themselves unable to make even minimum payments.

While a home equity loan or debt-consolidation plan may help short-term, many who choose these solutions eventually end up filing for bankruptcy.

Credit Problems

Overspending can contribute to a situation that forces someone to file for bankruptcy. Over time, more money going out than coming in leads to missed payments and reliance on credit.

Many people also do not have an emergency fund or savings to see them through tough financial times, compounding credit problems.

Strategies to Avoid Bankruptcy

While the road to bankruptcy often involves factors outside one’s control, there are some strategies to avoid it:

Create a Budget

The first step to getting finances under control is understanding where your money is going. Track income and expenses to identify areas to cut back.

Sticking to a realistic budget can help you live within your means and start paying down debt.

Cut Unnecessary Expenses

Look for ways to reduce monthly bills – cancel subscriptions, eat out less, downsize your car or home if needed. Every little bit helps.

Consider a side hustle or selling unused items for extra cash to put towards debt.

Increase Income

Increasing income, even temporarily, can provide much-needed breathing room. Ask for a raise, take on additional hours, or look for higher-paying opportunities.

Funnel any extra income directly to paying off debt principals.

Seek Credit Counseling

Non-profit credit counseling agencies can help you create a debt management plan and often negotiate lower interest rates and waived fees with creditors.

A credit counselor can help you budget, manage debt, and avoid bankruptcy.

Consider Debt Consolidation

Debt consolidation combines multiple debts into one monthly payment, often at a lower interest rate. This can help make debt more manageable.

Be cautious though, and avoid taking on new debt to pay off old obligations. Stick to a strict repayment plan to succeed with consolidation.

Key Takeaway: 

Bankruptcy often stems from overwhelming debt, job loss, or unexpected medical bills. But with a solid budget, cutting costs, and seeking help like credit counseling or debt consolidation, you can steer clear of it.

Understanding the Bankruptcy Process

Bankruptcy is a legal process that provides a fresh financial start for individuals and businesses who are unable to repay their debts. It’s a chance to reset and better position yourself for the current economy. The bankruptcy process can vary depending on the type of bankruptcy you choose. Here’s a quick rundown of what to expect:

Chapter 7 Bankruptcy

Also known as liquidation bankruptcy, Chapter 7 filing involves selling off certain assets and using the proceeds to pay off some of your eligible debts. The remaining debt will be canceled. According to the IRS, Chapter 7 is available regardless of what is owed and whether a debtor is solvent. Those who file will work with a court-appointed bankruptcy trustee who will oversee the process. In Chapter 13, you agree to a repayment plan to pay off your debts over time, typically 3-5 years. This allows you to keep your property while catching up on secured debt like mortgage payments. Your repayment plan must be approved by the bankruptcy court. Once approved, you’ll make payments to a trustee who will distribute funds to your creditors according to the plan.

Role of the Bankruptcy Trustee

When you file bankruptcy, a trustee is appointed to administer your case. In Chapter 7, the trustee’s main role is to sell your nonexempt assets and distribute proceeds to creditors. In Chapter 13, the trustee collects your plan payments and pays creditors. They also review your case to ensure you’re following bankruptcy law and not abusing the system.

Automatic Stay

One major benefit of filing bankruptcy is the automatic stay. This federal law stops most collection actions against you, like:

  • Foreclosure
  • Repossession
  • Wage garnishment
  • Utility shut-offs
  • Debt collection lawsuits

The automatic stay gives you breathing room while you go through the bankruptcy process. Creditors cannot contact you or try to collect debts without permission from the court.

Bankruptcy Discharge

The ultimate goal of bankruptcy is to receive a discharge – a court order that releases you from liability for certain debts. Once debts are discharged, creditors can no longer attempt to collect them from you. Most unsecured debts like credit card balances, medical bills, and personal loans are dischargeable. However, some debts cannot be eliminated in bankruptcy, including:

  • Most student loans
  • Child support and alimony
  • Court-ordered restitution
  • Some tax debts

It’s important to understand which debts can and cannot be discharged before filing bankruptcy. An experienced bankruptcy lawyer can evaluate your situation and explain your options.

Alternatives to Bankruptcy

Bankruptcy can provide much-needed relief, but it’s not the only way to deal with overwhelming debt. Before you file, consider these alternatives: A debt management plan (DMP) is a structured repayment plan set up through a credit counseling agency. You make one monthly payment to the agency, which then distributes funds to your creditors. DMPs can help you pay off unsecured debts in 3-5 years, often with reduced interest rates and waived fees. However, you must have a steady income to qualify.

Debt Consolidation Loans

With a debt consolidation loan, you borrow money to pay off multiple debts, leaving you with just one monthly payment. This can simplify your finances and potentially lower your interest rate. To qualify for a debt consolidation loan with favorable terms, you typically need good credit and a stable income. If you’re struggling to keep up with payments, you may not be approved. Debt settlement involves negotiating with creditors to pay off your debts for less than you owe. You can work with a debt settlement company or attempt to settle debts on your own. While debt settlement may allow you to resolve debts for a fraction of the balance, it can have serious consequences. Settled debts may be reported as negative items on your credit report, and forgiven amounts may be considered taxable income.

Negotiating with Creditors

If you’re experiencing financial hardship, reach out to your creditors directly. Many lenders are willing to work with borrowers to create more affordable payment plans. You may be able to negotiate lower interest rates, reduced payments, or deferred due dates. Just be sure to get any agreements in writing. The decision to file bankruptcy is highly personal. It’s not an easy choice, but for many people, it’s the best way to get a fresh start financially. If you’re considering bankruptcy, speak with a qualified attorney who can guide you through the process and help you weigh your options.

Key Takeaway: 

Bankruptcy is a legal way to hit the reset button on your finances, but it’s not one-size-fits-all. From selling assets in Chapter 7 to setting up repayment plans in Chapter 13, each type has its own path. Don’t forget: there are alternatives like debt management plans and negotiating with creditors that could help you avoid bankruptcy altogether.


Filing for bankruptcy is never an easy decision. But for many, it’s a necessary one. Whether it’s due to job loss, medical bills, or an underwater mortgage, bankruptcy can provide a fresh start.

But it’s not the only option. By creating a budget, cutting expenses, and seeking credit counseling, you may be able to avoid bankruptcy altogether. And if you do file, remember: it’s not the end of the world. By dedicating some time and hard work, rebuilding your credit becomes not just a dream but an achievable goal that puts you back on firm financial feet.

So if you’re facing financial hardship, don’t lose hope. Explore your options, seek help, and keep pushing forward. A brighter financial future is within reach.

For more information regarding Chapter 7 or Chapter 13 bankruptcy, schedule a consultation with The Law Office of William Waldner. It’s free and no obligation!