Sense & Centsibility Blog

The Top 3 Reasons People File Bankruptcy (And Tips to Avoid Them)

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As a financial counselor with LSS, I provide bankruptcy services to clients, including individual counseling and teaching a financial management course. This experience coupled with bankruptcy statistics show that the top three reasons for filing bankruptcy are medical debts, job loss, and overspending, in that order.

Maybe this surprises you! People often assume that overspending is the number one cause of bankruptcy. Besides being false, this assumption tends to cast blame on those who seek bankruptcy protection. In my view, blaming these folks for their financial mess is both unwarranted and unfair.

My job is to address the causes that led to bankruptcy, and look for ways to avoid financial pitfalls down the road. I also believe in the importance of learning from our mistakes.  Even better is learning from other’s mistakes, without having to stumble ourselves. And what I have learned from others is to be prepared for the unexpected as best you can to avoid bankruptcy!

Medical Expenses: 

While you may think medical debts pile up due to lack of health insurance, data shows most of these folks had some type of coverage. When someone is plagued by serious medical issues or injuries, medical costs snowball quickly!

How can you be prepared for a medical catastrophe? 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 those 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.

Third, if your family never reaches the deductible, consider yourself fortunate! Then, look at past years’ out of pocket medical costs to calculate a reasonable average. As above, save that amount in an HSA, FSA, or private account so you can afford to see the doctor when you need to.

If you need medical coverage, start your research at which offers loads of free information and health insurance guides by state.

Job Loss: 

When someone loses a job, financial crisis can be inevitable. If there is little or no emergency savings, how can you take care of your family? Collecting unemployment benefits can help but only offers a fraction of your wages.

The unemployed often lose health insurance too since COBRA premiums can be exorbitant. What savings they have may be drained to cover higher premiums. And with no health coverage, the risk of financial devastation sky rockets if a family member gets sick or hurt.

Building a healthy 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!


This should be the easiest problem to solve since what we spend is within our control. Yet, many people don’t realize they overspend because they have no idea where their money goes. If this sounds like you, track your spending for at least 30 days. Carry a pad and pen to jot down all expenditures. Check out our expense tracking form and get started today! Or, download an app for your smart phone and get tracking.

Others just can’t control their spending! If you fall in this category, you may want to find help through mental health counseling, or organizations that address compulsive spending such as or

Although we can’t plan for every contingency, when we take the time to understand our finances and save for emergencies, we are doing our best for our families. And, what more can we ask of anyone?
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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. Whether it's debt, bankruptcy, money management or reaching fianancial goals--LSS is here to help. Call us today at 888.577.2227, or visit our website. Our counselors will help you develop a budget and plan of action to help you find financial success!