How Does Bankruptcy Occur?

Filing for bankruptcy can provide a fresh financial start for people who are saddled with a mountain of debt. However, a bankruptcy can show on a credit report for up to 10 years, making obtaining new credit at affordable interest rates extremely difficult. Individuals file for bankruptcy as a last resort when they are overwhelmed with debt. How they get there may vary.


In simple terms, bankruptcy means that you are insolvent and cannot afford to repay your debts. Filing bankruptcy is the process of seeking legal relief from your debts and obtaining protection from your creditors. Consumers may either qualify for Chapter 7 bankruptcy, where all eligible debts are discharged, and the consumer is required to make no further payments, or Chapter 13, where the consumer is set up on a payment plan where a portion of the debt is repaid over three to five years.

Medical Debt

According to a 2009 study conducted by The American Journal of Medicine, 62.1 percent of personal bankruptcies in 2007 were the result of excessive medical bills, with 92 percent of the filers reporting medical debt of more than $5,000. About 75 percent of these filers had some type of health insurance in place. This leads to the conclusion that people typically do not purchase, or cannot afford, enough health insurance coverage to be fully protected against catastrophic loss.

Credit Card Debt

Due to their convenience, credit cards are a way many end up racking up too much debt. Some use cards irresponsibly to purchase non-necessities, but if you have low or no income, you may end up using your credit cards just to get by. Adding new purchases to unpaid balances with high interest rates can lead to snowballing debt the consumer may not be able to repay. According to University of California San Diego economics professor Michelle J. White, the average bankruptcy filer in 2004 had credit card debt of $25,000.

High Interest Loans

The worse your credit, the more lenders will often charge you in interest. This can lead to consumers digging themselves deeper and deeper into a hole. Some go into to debt on unaffordable mortgages. Prior to the mortgage crisis of 2008 and 2009, some lenders engaged in the practice of granting mortgages to borrowers who could not afford them. People found themselves trapped in an adjustable-rate mortgage that led to higher mortgage payments they could not afford to make when interest rates skyrocketed, often leading to foreclosure or bankruptcy.