Iran is suffering from a state of water bankruptcy. Several factors have contributed to the current water resources bankruptcy, ranging from anthropogenic impacts, such as an inefficient agricultural sector and aggressive withdrawal of groundwater, to climatological impacts. This paper suggests that water resources mismanagement in Iran should be evaluated beyond the policy-makers decisions, as it recognizes that the bankruptcy has been intensified due to the structural and institutional form of the political system in Iran. This study discusses the roots of the water bankruptcy and identifies four major shortcomings caused by the political system: (1) the absence of public engagement due to the lack of a democratic and decentralized structure; (2) adopting ideological policies in domestic and foreign affairs; (3) conflicts of interest and the multiplicity of governmental policy-makers and sectors; and (4) a state-controlled, resource-dependent economy. Through the development of a generic causal model, this study recommends a systematic transition towards a democratic, decentralized, non-ideological, and economically diverse political governance as the necessary–but not necessarily sufficient–adaptive and sustainable solution for mitigating the impacts of water resources bankruptcy in Iran. The insights highlighted in this paper could be employed to inform water resources decision-makers and political actors in other non-democratic and ideological political structures struggling with a water resources crisis or bankruptcy.