Why Individuals File Bankruptcy

According to the American Bankruptcy Institute there are many reasons that individuals file bankruptcy.  However the number of personal bankruptcy filings by Americans of all ages peaked at 1.5 million in 2010, the highest level since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act made it more difficult to have debt forgiven. Filings declined to about 935,000 by 2014 and lower in 2015.


The Institute for Financial Literacy reports that older people are making up an increasing proportion of bankruptcy filers. The over-65 group made up 8.3 percent of all filers in 2009, or about 99,600, a rise from 7.8 percent in 2006.

Most bankruptcy filers were employed when they filed, but about 10% were retired.

The top five reasons for filing bankruptcy, are:

reasons why individuals file bankruptcy
reasons why individuals file bankruptcy

Other reasons for bankruptcies that were cited by filers included:

  • Divorce (15.1%)
  • Birth or adoption of child (9.7%)
  • Death of family member (7.5%)
  • Retirement (6.7%)
  • Identity theft (1.9%)

Multiple reasons that debtors file bankruptcy

Often it is multiple reasons debtor file for bankruptcy. The percentage of respondents reporting the number of the five leading reasons for bankruptcy were:

  • None of the five reasons (8%)
  • One of the five reasons (22%)
  • Two of the five reasons (23%)
  • Three of the five reasons (27%)
  • Four of the five reasons (18%)
  • All five reasons (3%)

This is consistent with the facts that bankruptcies primarily result from an income or expense shock, then form loop spiraling out of control.

When credit cards are mentioned as a reason for bankruptcy, some assume that these households used consumer credit to live beyond their means. This is surely true of some households, but in many instances credit cards are the last resort for households whose finances are spiraling downward for other reasons, such as unemployment, medical expenses, or the death of a spouse or divorce.

Once the downward spiral begins, it often cannot be stopped. Reducing spending is, by definition of the crisis, not an option — if we had the ability to adequately reduce spending, we wouldn’t be in a spending crisis. The magnitude of this risk is greater than that of earnings risk, entailing both loss of standard of living and bankruptcy.