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Bankruptcies occur with staggering frequency. They typically result from one of five causes: medical expenses, job loss, excessive use of credit, divorce and unexpected expenses. When these issues result in unmanageable debt, personal bankruptcy is often the only way to avoid a future plagued by debt and insecurity.

Medical Expenses

Healthcare reform dominates political discourse in Washington, and when you consider that medical expenses are the number one reason for personal bankruptcy, it’s easy to see why. Unfortunately, having insurance is often insufficient to prevent medical-related bankruptcy, as shown by a Harvard study that indicated 78% of bankruptcy filers have health insurance. Few people have the disposable income necessary to meet the out-of-pocket costs of a major illness.

When overwhelmed by medical bills, many families find that bankruptcy is the best way to protect certain assets. In a Chapter 7 bankruptcy, retirement accounts and a certain amount of home equity are protected. Medical debtors with too much income or home equity to qualify for a Chapter 7 can protect their retirement and homes through a Chapter 13 bankruptcy.

Tips for avoiding medical bankruptcy: Carry insurance with out-of-pocket maximums you can afford. Fund a health savings account with sufficient money to cover the worst-case scenario for out-of-pocket expenses.

Job Loss

In today’s fluid labor market, job losses are more common than in previous decades. When a lost job is combined with a high cost of living or large debts, a pink slip can quickly result in bankruptcy. The unfortunate truth is that once households fall several months behind and face issues like foreclosure, eviction, auto repossession, credit card defaults and creditor lawsuits, bankruptcy becomes the only way to eliminate these problems and secure their future. There is a point at which these problems will plague the household indefinitely unless the debts are discharged in bankruptcy. Wage garnishments, bank levies and other collection devices can keep families in a permanent cycle of debt and poverty.

Tips for avoiding job-loss related bankruptcy: Build an emergency fund sufficient to cover six months of essential spending. Essential spending includes all bills that must be paid each month and cannot be deferred. For example, rent, utilities, food, car payments and credit card bills are all essential, while student loan payments can be deferred during periods of unemployment.

Excess use of credit

This bankruptcy risk is especially problematic in areas with a high cost of living. It can become too easy to fall behind each month and utilize credit to make up for the shortfall. When this problem is combined with irresponsible overspending on non-essentials, debt can spin out of control to the point where bankruptcy becomes the only option to prevent a future of unmanageable debt.

Tips for avoiding excessive-use-of-credit bankruptcy: Live on a budget and stick to it regardless of the temptation to make purchases that exceed it. Never carry credit card balances unless as an absolute last resort and avoid spending more than one-third of income of housing.


Divorce is hard enough without going bankrupt in the process, but divorce related bankruptcy is a reality for millions of American couples. Most families have very little savings and spend almost or all that they make. Divorce then ups these expenses through the need to maintain separate residences. Legal fees are astronomical, and acrimonious divorces can result in bankruptcy as a result of the legal costs alone. On top of these expenses, child support and alimony payments often result in an inability to pay other bills, making bankruptcy inevitable. Often, the only way ex-spouses can meet divorce decree financial obligations is to discharge other debts in bankruptcy.

Tips for avoiding divorce-related bankruptcy: Try to resolve the case in mediation. This prevents the astronomical costs of litigation and has a better chance of resulting in an agreement that allows both parties to afford their financial obligations.

Unexpected expenses

It’s not a question of if unexpected expenses will hit, it’s a question of when. Often, they happen at the worst possible times, such as when money is tight, or repair bills will be most expensive. A series of small unexpected expenses, such as vehicle and home repairs, can result in unmanageable credit card debt that pushes households toward bankruptcy. A large, unexpected event like a house fire, earthquake or flood can bankrupt families in one fell swoop.

Tips for avoiding unexpected-expense-related bankruptcy: Carry insurance for devastating disasters, such as earthquakes or fires, and have an emergency fund in the bank.

Bankruptcy often becomes the only way for families to achieve financial security. Without a bankruptcy discharge, old debts can continually resurface with added fees, resulting in an endless cycle of debt and financial insecurity. By understanding the top 5 reasons for bankruptcy, households can proactively arrange their finances to avoid these pitfalls.

Hines Law Offices is full-service bankruptcy firm that handles all types of debt relief matters to the residents of Massachusetts. With over 15 years’ experience and knowledge in personal bankruptcy cases, we are committed to safeguard your interests and help gain financial control of your future. Our bankruptcy attorneys specialize in Chapter 7 and Chapter 13 cases as well as help implement a financial rebuilding plan. Hines Law will provide the right solution to your case. Call today for a Free Consultation!