Sense & Centsibility Blog
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3 Causes of Bankruptcy & How to Avoid Them

People make a lot of assumptions about those who file bankruptcy. You may think that the number one reason for bankruptcy is overspending, but you'd be wrong. In the financial counseling world we see every scenario you can imagine.  The top 3 reasons for filing bankruptcy are medical debt, job loss, and overspending - in that order.

Bankruptcy can be the right solution if all other options are exhausted, but we do our best to help people avoid bankruptcy. LSS financial counselors work with people to address the root cause of the debt and look for ways to avoid financial pitfalls down the road.

Medical Expenses

While medical debts can pile up due to lack of health insurance, many people incur debt even with insurance. Medical costs can be staggering when you suffer from serious medical issues or injuries - chronic or short-term.

How can you be prepared for medical problems?

First, get the best insurance plan you can afford. Even if you are young and healthy, a hospital plan that covers injuries and major illness can be a financial lifesaver if you have an accident.

Second, plan for deductibles and out-of-pocket maximums. You know your family’s medical history better than anyone else. Use a Health Savings Account (HSA) or Flexible Saving Account (FSA) to set aside money you know you will need. Not only will you have a medical safety net, you will reduce taxable income since contributions to these accounts are not taxed.

If you don't have medical coverage or your employer doesn't offer it, start your research at which offers loads of free information and health insurance guides by state.

Job Loss

When you lose a job and can't find an immediate replacement, a financial crisis can be inevitable. If there is little or no emergency savings it's impossible to keep up on all of your bills and expenses with no savings. Collecting unemployment benefits can help but you're obviously not taking in as much income versus when you were working.

When you're unemployed you often lose health insurance and COBRA premiums can be expensive to maintain. What savings you do have may be drained to cover those higher premiums. And with no health coverage, the risk of getting into debt drastically increases when a family member gets sick or hurt.

What to do?

Building up a savings account can help relieve the stress of lost income; experts recommend saving 3-6 months' worth of household expenses in case of job loss. If you do the math, that number may be intimidating. But don’t let it stop you; there is no time like the present to start that savings plan. Start small, be consistent, and only use it when it's absolutely needed so you can watch your savings grow.


Many people don’t even realize they overspend because they have no idea where their money goes. If this sounds like you, the best thing to do is track your spending for at least 30 days. If you're a paper person, carry a pad and pen to jot down all expenditures. (Check out our expense tracking form.) Or if you're an app person, download one on your smart phone and get tracking.

It's impossible to plan for everything that can possibly happen. However, you will be much more prepared to handle a crisis if you start now by taking the time to understand your finances and save for emergencies.

Getting out of debt is a tough challenge, but you CAN do it. All you need is a realistic plan and the tools to help shape healthy financial habits. LSS is here to help. Call us today at 888-577-2227 or CLICK HERE for your free online financial counseling session. Our counselors will help you develop a budget and plan of action to help you achieve financial stability.