Skip to content

More Than 50% of All Bankruptcies are Due to Stupidity

Have you ever spoken with someone after they filed for bankruptcy? They might rattle off a few reasons why they couldn’t avoid it, but after the conversation ends and you both depart, you find that you’re still not satisfied with their response. In fact, you might even be left scratching your head thinking, “That bankruptcy sounded incredibly stupid. If they would have just thought for a second, it could have easily been avoided.”

After hearing my fair share of bankruptcy stories, I’ve often had the same thoughts. Just recently though, I finally decided to sit down and do the research to find out just how many bankruptcies are due to stupidity. 

Bankruptcy Trends

In reviewing the bankruptcy trends over the last 10 years, it didn’t come as much of a shock that bankruptcies were at their highest point in 2010, just a couple of years into The Great Recession. What became intriguing though, was the striking correlation between the U.S. unemployment rates and the bankruptcy filing rates.

bankruptcies are due to stupidity

Source: LeadQ

As one can pretty easily deduce from the chart above, when unemployment rates go up, so do bankruptcy filings. When the rate of unemployment goes down, the rate of bankruptcy filings also follow suit. While this may seem intuitive to many, it just didn’t seem quite right to me. With a little bit of savings or investments, I would suspect that people would be able to last a year or two before they actually file for bankruptcy. However, this graph would suggest that in times of hardship, people find themselves in trouble almost immediately – likely because they were spending beyond their means or had little to no savings.

What Are the Top Causes of Bankruptcy?

bankruptcies are due to stupidityBefore I immediately point my finger at everyone that filed for bankruptcy in their lifetime (while shouting, “You’re all stupid! You should have prepared for hardships!”), I decided to climb down off my pedestal and do my best to discover the reasons why so many people file for bankruptcy each year. According to Investopedia.com, the top 5 causes of bankruptcy are as follows:

  1. Medical Expenses
  2. Job Loss
  3. Poor/Excessive Use of Credit
  4. Divorce/Separation
  5. Unexpected Expenses

An alarming 62% of those that filed for bankruptcy attribute their financial downfall to medical bills, and an even more alarming 78% of those people said they actually had medical insurance (it’s a good thing I got down from that pedestal, huh? ;)). Diseases such as cancer can be incredibly costly to treat, and many times only a portion of the expenses are covered by insurance, leaving the patient with stacks of medical bills totaling $100,000 or more. For these unfortunate individuals that thought they were protected from financial ruin, I cannot point my finger.

However, 38% of bankruptcy filings attribute job loss, poor use of credit, divorce, and unexpected expenses to their financial demise. Each one of these reasons could have easily been avoided with fewer stupid debts and more savings. Couple this with the 14% of individuals that went bankrupt because they didn’t have medical insurance, and we can quite confidently say that 52% of bankruptcies are due to stupidity.

bankruptcies are due to stupidityThe Common Paycheck-to Paycheck Lifestyle

If you had to venture a guess, what percentage of people would you say are living paycheck to paycheck? Meaning that if something catastrophic happened, they would not be able to come up with the money to cover six months’ worth of expenses. 25%? 50%? 75%?

The amount of people living paycheck to paycheck is absolutely alarming. CCN Money reports that 76% of people are living a paycheck to paycheck lifestyle. These people could not cover their expenses for six months, and 50% of those interviewed would not even be able to cover their expenses for three months! And, 27% of those surveyed had no savings whatsoever.

This survey (along with the millions of others that show Americans aren’t saving enough) is excellent proof for the leading chart in this article. When hardships come such as job loss, too much debt, divorce, or unexpected expenses, 27% of Americans would be in trouble immediately and 50% would have to surrender after less than three months of hardship. The statement that 52% of bankruptcies are due to stupidity is becoming more believable isn’t it?

How to Avoid Your Future Bankruptcy

Nobody ever plans to go bankrupt, but many could easily avoid it. The method is simple:

  • Live with as little debt as possible
  • Keep six months’ worth of expenses in savings

That’s it. Do these two things and you won’t become part of the 52% that go bankrupt because of stupidity.

If you’d like to avoid bankruptcy altogether (in other words, avoid going bankrupt even if you’re diagnosed with a terrible disease), then I would suggest that you get radical. Start tracking your net worth and grow it as fast as possible. Do this by increasing your income and by cutting your expenses in half. This will put you on the fast track to an unbelievably large net worth, which should keep you from ever having to utter the word, “bankruptcy”.

Do you think that over half of all bankruptcies are due to stupidity?

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

8 Comments

  1. I think so. People are just spending beyond their means either as result of lack of self esteem or just trying to keep up with others.

    My wife and I went to a recent open house as we are in the process of looking at homes. We found out that the house was for sale because of divorce. Not only that, the realtor kept talking up the $40K they spent on custom window coverings and the $29K on high end light fixtures. The kicker was that these things were hideous. I told my wife we should put in a bid for $60K under asking price and tell them to take the light fixtures and window coverings with them!

    • Yup. It’s amazing how many people are spending beyond their means, but then again it’s hard to realize when everyone around you is doing the same thing! Haha, great story about the light fixtures and window coverings. I can see the hideousness now… 😉

  2. You have great points. People would be able to last a little bit longer if they had saved money. Medical expenses are the main reasons even when you have insurance? I don’t believe that that many of people have cancer or incurable diseases. [and let me laugh at the divorce one].
    Thanks for the great post and deduction!

    • Thanks Marcel! It is pretty crazy how many people think their bankruptcy was unavoidable, when in actuality if they just had an emergency fund they would have been just fine!

  3. One thing I find interesting is that, despite the fact that super high deductible insurance plans can no longer be sold, bankruptcies have not meaningfully deviated from their prior trend.

    In the US, medical care is expensive even if you’re insured. If I got unlucky enough to get cancer in November, I would expect to pay $24000 in medical bills over the course of two years. I could definitely cover this, but it would wipe out my e-fund. And I also wouldn’t be working, and my long term disability insurance doesn’t kick in until 6 months. Even though I am rich, and have after tax investments, I would be taking a kick in the mouth should I ever get so unlucky. I see how others have to file bankruptcy in a similar situation.

    • Hi Hannah. I’m definitely no insurance expert, but I know that there are typically caps on how much an insurance company will pay. Once your bills go over that cap, you’ve got serious financial problems no matter how much you’ve got in your emergency fund.


Add a Comment

Your email address will not be published. Required fields are marked *

Related posts