The correct answer is many people could not afford to pay banks back during the Depression.
One of the most significant reasons why people could not pay back their loans to the bank was because of the Stock Market Crash of 1929. During the 1920's, many Americans were able to afford stocks because they bought them on margin. This meant that they would put 10% down and borrow the other 90% of the value of the stock from the bank.
When the stock market crashed in 1929, many people saw their once valuable stocks drop in value significantly. Since there were so few buyers of stocks at this time, people were stuck with these almost worthless stocks and could not get cash. Since they did not have cash, they could not pay back the bank. Since this was the case, many banks ran out of money, causing them to shut down completely.