Avoid These Mistakes That Will Lead to Household Bankruptcy

Shannon Quinn - April 30, 2021
Living paycheck to paycheck can put financial stress on your household. Credit: Shutterstock

15. Being Satisfied With Living Paycheck to Paycheck

Saying that you should stop living paycheck to paycheck to avoid bankruptcy is easier said than done. In fact, it’s kind of a slap in the face, right? You can’t stop struggling by waving a major wand. Back in 2019, Charles Schwab conducted research that found that 59% of Americans were living paycheck to paycheck…And that was before the pandemic. Now, that statistic is much worse. So you’re far from alone. 


However, in times like these we need to adapt to our new environment and evolve in order to survive. Everyone in my inner circle experienced some form of layoff, unemployment, or less income this past year. And yet all of us found a way to pivot. This was not easy. We all struggled. But in the end, many of us are coming out the other end being in a better financial situation than we were before. The only way you can stop living paycheck to paycheck is to change your lifestyle, get a better job, and make more money. For you, that may mean starting a business, or going back to school. It’s not easy. But it may be the only way to move forward.

Living alone is more expensive than having roommates. Credit: Shutterstock

14. Living Alone

Some people have a lot of pride in living alone. They feel like it’s a representation of their independence and success. However, if you’re actually struggling financially, it doesn’t make sense to continue with that lifestyle. Consider bringing in a roommate, even if it’s only for a year or two before you get back on your feet. 

Obviously, with Covid-19, living with a roommate is a lot more complicated. You don’t want to live with someone whose lifestyle doesn’t align with yours when it comes to safety and only maintaining contact with people in your bubble. Because of this, you may want to consider moving in with a family member or close friends.

The healthier you are, the less likely you’ll end up declaring bankruptcy. Credit: Shutterstock

13. Not Making Health a Priority

One of the biggest issues in the United States is our inadequate healthcare system. A Harvard study shows that a whopping 29% of bankruptcies are only due to an overwhelming amount of medical debt. Another 56% of bankruptcies included some kind of medical debt in their grand total along with credit cards. What does that tell you? Obviously, number one; get health insurance. If your job doesn’t offer it, sign up on Healthcare.gov. The one positive thing about the pandemic is that it has made health insurance more affordable. Please check this out, and don’t be afraid to call a customer service representative if you have questions.

Secondly, if you want to avoid declaring bankruptcy due to medical debt, the obvious thing to do is to take better care of your health. Eat healthy, exercise, and avoid unhealthy habits like binge drinking and smoking. If you’re unfamiliar with nutrition and how it affects your health and finances, I highly recommend watching the documentaries Fat, Sick, and Nearly Dead. This was life-changing for me, and my entire family.

If you don’t save for an emergency, you have a higher likelihood of declaring bankruptcy. Credit: Shutterstock

12. Never Saving For a Rainy Day

According to CNBC, 61% of all Americans ran out of their emergency funds in 2020. As I am writing this, it’s now 2021, and the situation is only getting worse. So I completely understand the advice to “just save money!” sounds laughable right now. But the reality is that in order to avoid bankruptcy, you need to have an emergency fund to cover you when things go wrong.


Remember that no matter how bad things get, there is always an opportunity to make money. For example, during the pandemic, there was an increased demand for delivery drivers, and Amazon was hiring like crazy. While these might not be ideal for you, it could be seen as a temporary means to an end. There are some people out there who took advantage of this, and found a way to increase their savings, rather than letting it dwindle away.

When you live in a scarcity mindset, it only makes it more difficult to succeed. Credit: Shutterstock

11. Having a Scarcity Mindset

More often than not, having a negative outlook around money, or a “scarcity mindset” only leads you down a path of making a problem worse. If you keep telling yourself that things are difficult, there is never enough money, etc., then that will always be true. Positive change is never going to happen in your life until you begin to think positively. I am a firm believer in the “abundance mindset”. Once I stopped feeling sorry for myself and began seeing things in abundance, it changed my life. I realized that the more positive and abundant I feel, the easier it is to bounce back from financial issues. Even when I’m faced with really scary challenges, I just keep going. It’s like the rewards are just beyond the horizon, like defeating a boss in a video game. 


I’m sure many of you are rolling your eyes, right? Some people complain about “toxic positivity”, because they just need a minute to sulk. This is specially true here in America, where our national default seems to be encouraging rather than acknowledging sadness or feeding into the gloom. It’s okay to be sad. And it’s okay mourn what you’ve lost- whether that’s a job, lifestyle, or money. I’ve been there. But trust me when I say that it’s better to release your frustration in a healthy way, and then let it go. 

If you lost your job due to Covid, get unemployment. Credit: Shutterstock

10. Refusing to Sign up For Government Assistance Programs

It’s a huge mistake to avoid signing up for the government assistant programs that are in place to help us during the pandemic. Even if you could get a new job quickly, or if you feel like you “should” be able to make it by living on your savings, just take the free money that’s available to you. By swallowing your pride, you’ll avoid getting closer to bankruptcy.  For the first few months of the pandemic, I didn’t sign up for any kind of assistance from the government. It was really just about having a lot of pride. But once I contacted the Small Business Association, I was able to secure a grant (free money I don’t have to pay back!) to help my business. In retrospect, I made the right choice by filling out the paperwork to ask for help. 

At the end of the day, pride does nothing for you. If you have been working all your life, that means that you have been paying taxes and contributing towards your unemployment and programs through FEMA. When you think about it that way, it’s almost like the government was forcing you to create a savings account that you’re allowed to tap into during emergencies like this. This is the mindset that I had to adopt in order to accept help, and it may help you, too. I thought about all the long hours I worked from the time that I was 14 years old. That helped me to realize that I deserve this help, and it’s the farthest thing from a free handout.

If you can’t afford two cars, you may want to sell one. Credit: Shutterstock

9. Having Multiple Car Payments Per Household

For whatever reason, Americans love cars. It’s part of our culture. Having a new car is a status symbol, and we feel that the type of car you drive says a lot about your personality. In a lot of families, every adult has their own car. Sometimes, this is actually necessary. Public transportation is notoriously unreliable here, and most people commute 10 miles or more to their job. According to Lending Tree, the average American pays $563 per month per car payment. Yikes. Now, imagine a household where you have two, or even three cars. 


Car payments are to blame for millions of people’s financial difficulties. And unlike the rent and mortgage assistance we’re seeing from the government, there is no help from the government to prevent you from having your car repossessed.  If you’re facing financial difficulty, it may be time for you to sell your car before it’s taken away from you. With more people working from home, hopefully you can work out a way to coordinate borrowing one vehicle per household.

Sometimes, it’s best to downsize. Credit: Shutterstock

8. Refusing to Downsize or Move to a Cheaper Location

If you’re on the edge of bankruptcy, it only makes sense for you to move to a cheaper place to live. In 2021, we’re in the middle of a housing crisis, and there is no telling how long it will continue. Moving is very expensive right now. So it’s totally understandable if you can’t find a new place to live that is actually cheaper than where you currently live. 

But if you can’t actually afford your rent or mortgage, you may need to figure out a way to make that more affordable. It may mean that you need to move in with relatives, get a roommate, or even live in a trailer. This could be temporary until you get back on your feet. I personally know people who refused to leave their mansion, because they felt like they “deserved” it, and ended up losing everything to bankruptcy. It’s better to get a smaller house and maintain financial stability than to literally lose everything.

Please don’t take out a payday loan. Credit: Shutterstock

7. Falling Prey to Payday Loans

When you’re in financial trouble, you might have considered getting something called a payday loan. If you’re not aware, it’s a private company that is willing to loan you money, but you end up giving back 400% of what you borrowed. The vast majority of people who take out payday loans don’t have a college degree, make less than $40,000 per year, and are predominantly African American. Basically, they’re loan sharks who are targeting the most vulnerable communities. All you need for a payday loan is a paycheck, a checking account, and a photo ID. They will lend to anyone, even if your credit score is terrible.

People take out these loans because they think it’s a quick fix for their problems. And they already are in such bad financial straits that they may not qualify for a credit card, or a traditional loan with a bank. Even though it might alleviate your stress for a day, it’s going to make the problem ten times worse down the line. For most people who end up borrowing money, they can’t afford their payment. So then it rolls over into a new loan with the company at an even higher interest rate. For a lot of people, these payday loans force them to file bankruptcy in order to escape them. So please– don’t do it.

The more debt you have, the harder it is to live. Credit: Shutterstock

6. Having a High Debt-to-Income Ratio

Whenever you try to take out a loan, or you’re checking your credit score, they always look at your debt-to-income ratio. As in- Can you really afford this? How long will this debt take to pay off? But let’s be real. A lot of companies will ask for your income, and take your word for it. It’s easy to agree to payment plans or open a new credit card that you actually can’t afford. They’re trying to make money, and they don’t care if it ends up ruining your life in the process. You need to look out yourself, and figure out your own healthy debt-to-income ratio.

I’ll never forget what a customer said when I worked at a bank. Their account went into the negative, and they angrily said, “Why didn’t you stop me from spending? Why didn’t you call me? You’re the bank. Isn’t it your job to manage my money?” Uh…No. It’s the bank’s job to hold your money. You would need to hire an accountant to monitor your spending for you. Remember that it’s not the credit card company’s job to tell you what you can and can’t afford. It’s not the bank’s job to cut you off when you’ve had too much. It’s all on you. Don’t let it get out of hand.

Is peer pressure causing you to spend more money? Credit: Shutterstock

5. Giving In to Peer Pressure

The phrase “Keeping up with the Joneses” is famous for a reason. It’s human nature to be competitive and feel like we are achieving just as much as the next person. This has become especially true in the age of Instagram. But this habit of constantly comparing ourselves to others is a form of peer pressure. It doesn’t matter if you’re a full grown adult. We’re still going to feel pressure to be like people who are the same age as us, and this can push us to spend money we don’t actually have.

You need to look at your own personal financial situation as an objective observer. Try to take your emotions out of the situation, and just look at the math. Can you really afford it? Don’t make decisions based on what your friend can afford. Figure out what you can afford first. For example, just because two of your friends bought a house recently or went on a vacation overseas doesn’t mean that you should too. 

Drinking and smoking is actually very expensive. Credit: Shutterstock

4. Maintaining Expensive and Unhealthy Habits

Did you know that 78% of former NFL players end up declaring bankruptcy just two years into retirement? This is often because they indulge in unhealthy habits, and never stop to think about how they are going to invest their money for the future. They also assume their windfall of money is going to last forever, when it’s really just a finite amount. If you’re worried about money, ask yourself how much your bad habits like smoking, drinking, and unhealthy snacks costs you every month. The average smoker spends $2,295 per year on cigarettes, and the average household spends $525 per year on alcohol. (This number is obviously much higher for people who drink regularly.) That’s a huge chunk of money going towards bad habits.

I know someone who had a great job working in the legal field. She received a huge inheritance, including two additional houses. The total value was something like $500,000. Instead of using her inheritance to pay off her mortgage and debt, she quit her job and started indulging in unhealthy habits like smoking, drinking, food, and gambling.  Eventually, her husband got laid off from his job, and they lived on the remaining inheritance. They blamed the economy for not finding a new job. But she never stopped her bad habits. She lost everything, and had to declare bankruptcy. This situation is actually very common among people who get a huge windfall of money, and people who win the lottery. I look at her situation as a very slow-moving car crash. She could have hit the breaks or turned the steering wheel at any time.

You should never miss a payment towards your bills. Credit: Shutterstock

3. Missing Payments Towards Your Creditors

One of the surest ways to guarantee ending up in bankruptcy is to stop paying towards your debt. Even if you only paid a tiny amount of money towards your debt each month, it shows that you were trying. Most of the time, credit card companies will not take you to court until you have failed to make any payment for months at a time.

Call the banks, credit cards, and loan companies to see if there is an option for a payment plan. Sometimes, they will allow you to have the payment reduced down to just the interest. Then, when you get back on your feet, you can go back to making higher payments again.

If you refuse to sell anything, it’s inching you closer to bankruptcy. Credit: Shutterstock

2. Refusing to Sell or Give Anything Up

If you’re in a difficult financial situation, one of the first things you can do is to sell your valuables. Nowadays, this is easier than ever. With apps like eBay, Depop, Facebook Marketplace, Mercari, Etsy, and Poshmark, you can sell almost anything if you have an Internet connection and a cellphone. Selling things you no longer need can be a good way to make some quick cash and pay a bill. Remember that some day, when finances get better, you can always buy that thing back. Holding on to your material things is not worth the shame, regret, and stress of declaring bankruptcy. 

I have been selling things on eBay since I was a teenager. Since this is such a big part of my life, it’s something that I talk to people about often. Whenever I met someone that was in a difficult financial situation, I would suggest that maybe they should sell something on eBay or Craigslist to get some emergency cash. I knew if they just listed their unused games online, they could earn $500 overnight and solve their problems. But for whatever reason, they refuse to let go of those things. Remember it’s just stuff. Usually, whenever I give something up in order to maintain my finances, it opens the door for something much better to replace it later.

Bankruptcy often happens because people avoid the issues. Credit: Shutterstock

1. Ignoring The Issue and Pretending It Will Go Away

Last but not least, you shouldn’t ignore your problems and pretend that it will somehow magically go away. I’ve met so many people who went bankrupt or were on the edge of bankruptcy because they totally ignored the reality of the situation. But if they had just faced the problem head-on and dealt with it, they could have maintained their finances.

Most of the time, this attitude comes from fear. If you feel so incredibly overwhelmed with financial problems, it’s easier to just pretend it’s not real. But trust me when I say that if you ignore the problem, it will only get worse. If you need advice, look at this guide on settling credit card debt from the FTC. There are so many options in place for you to make things right before you end up in bankruptcy court. All it takes is facing the issues early, before it gets out of hand.